November 1998

Contents:

Executive Summary

Introduction

Section 1
    Question 1: Access to networks and digital gateways
    Table 1 – Objectives which relate to anti–competitive effects of gateways

Section 2
    Question 2: Creating the framework for investment and innovation

Section 3
    Question 3: Ensuring a balanced approach to regulation

Annex A

Executive Summary

This document contains Oftel’s views on the three areas for further comment identified in the Commission’s working document.

The questions asked by the Commission are relevant to the 1999 EU Review of Telecommunications legislation and should be considered further in that context. Oftel believes a framework of principles for “1999 Review issues” can be created, and makes suggestions in Section 1 to achieve this.

Appropriate regulation of access of service providers to networks and through digital gateways is a key issues for the 1999 Review. Oftel believes that adaptation of the approach in the Advanced Television Standards Directive (Directive 95/47/EC ) to further, specified gateways is inappropriate: it is impossible to predict now where regulation might be required in a few years time. Increasing reliance on competition law helps but some sectoral rules to underpin competition are needed for the foreseeable future.

In Section 1 Oftel proposes a model for rules governing access to gateways to and within networks which:

– are generic to ensure consistency in approach across the converged sectors, and which can apply to new market/technology developments;

– form a coherent whole with competition law;

– are applied only after certain specified conditions are met. Few gateways need to be regulated; regulation should focus on those where competition is likely to be restricted and where   regulation is likely to bring overall benefit to consumers.

The aim is a regulatory framework that provides appropriate rules where regulation of access is justified, but avoids stultifying the market in cases where regulation is unnecessary.

In Section 2, we address the regulatory framework and investment. We do not consider that any special provisions are needed to tailor the regulatory framework to the levels of investment needed. It is quite possible to devise a regulatory framework which avoids stultifying new investment, whilst protecting consumers in a competitive market.

In Section 3, Oftel comments on a framework to achieve a balanced approach to regulation.

Introduction

1. Oftel welcomes the European Commission decision to now deepen the debate on convergence in certain key areas. The issues raised are relevant to the EU 1999 Review of Telecommunications legislation, and Oftel welcomes the Commission’s decision to take them forward in that context. The current Telecom Directives concentrated primarily on voice telephony. Increasingly the market is changing to become globally focused, data based, with players and alliances within and across the traditional boundaries. Regulators face an environment, where product life cycles maybe measured in weeks rather than months or years, potentially challenging traditional approaches to the application of both regulation and competition law. Fast–moving markets and different speeds in the development of competition, between regions and between different services markets, mean that an overly prescriptive approach to regulation is inappropriate. Such an approach will lead to over–regulation (and therefore, consequent under–investment and under–innovation) of competitive markets and/or to under–regulation (and lack of real competition) in markets where the incumbent retains a stranglehold. The Commission has noted “Europe needs a regulatory framework which is open, flexible and adaptable while giving sufficient legal certainty”.

2. Oftel proposes a regulatory regime (including self–regulation, wherever appropriate) based on agreed principles and objectives. The right template is a regime which is harmonised at the level of objectives and principles but not at the level of detailed rules: rules which deal with an issue in one market may be counterproductive in a market elsewhere if the state of competition is different. It will then be the task of the NRA to apply the right rule for the issue at hand, following agreed principles.

3. The regulatory regime should:

• reflect the importance of competition as a means to provide what the consumer wants;

• secure the independence of the regulator or regulators (from both organisations providing services and from day to day political pressures);

• promote consistency and coherence in the rules and their application;

• ensure transparent and accountable procedures;

• rely as much as possible on general horizontal (competition and consumer protection) EC law, imposing detailed sectoral rules only where necessary.

4. For the foreseeable future, sectoral rules will be needed to address such issue as universal service, interoperability and consumer protection. In addition, due to the special history and nature of telecommunications markets, the need for some sectoral rules to promote and underpin competition will remain .

5. Any sector specific rules should:

• be based on a clear rationale and objectives;

• be justified rigorously against the agreed objectives;

• be flexible enough to deal with new problems as they arise – AND there must be a quick way of removing rules designed for problems which no longer exist;

• take account of the different state of competition in different markets in different countries. However, regulatory principles and approach should be harmonised to ensure one style of regulation while retaining the flexibility to respond to individual market conditions;

• form a coherent whole with existing horizontal competition and consumer protection law.

6. Competition law based on Articles 85 and 86 of the Treaty of Rome ought to play an ever greater part in the regulation of EU communications markets. As competition becomes effective in a particular market, detailed ex ante regulation aimed to support competition will become redundant and should be withdrawn. Nevertheless, for the foreseeable future, Oftel believes that specific prescriptive rules are appropriate to deal with restrictions or distortions of competition where:

• operators with a degree of market power have incentives to seek commercial advantage by refusal to interconnect with other operators or grant access to service providers on reasonable terms;

• there are network externalities such as network access, interoperability (including numbering and addressing) and call termination;

• a supplier has control of “bottleneck” services or products, thereby preventing or restricting service providers from competing for customers or preventing or restricting end–users from accessing the service.

7. The Commission faces a major task in balancing the needs of all Member States. One of the clear concerns expressed by a number of respondents was that of rules being lifted inappropriately given that Member States are at different levels of market development. We recognize that concern and share it. Nevertheless it would also be inappropriate if to meet the needs of markets at an early stage of competitive development, rules were retained that could hold back markets which are more competitive

8. Tools are available which will assist the Commission to meet this challenge, while minimising the risk that any NRA would use the recommended flexibility inherent in the regime inappropriately:

• the imposition of a general obligation on Member States to adopt all measures necessary to secure the agreed objectives.

• the use of generic rules to promote coherence and to avoid obsolescence.

• the adoption of the principle of “forbearance” which empowers regulators (and in some cases requires them) to refrain from applying rules where they are unnecessary because agreed transparent objectives are being achieved by market forces or other means. To ensure consistency of approach across Member States the criteria for lifting such rules would need to be transparent and objective. This approach would lead to the reduction of sector specific regulation at a pace suited to the differing needs of each Member State.

• rules to promote or underpin competition should in general be applied only to those with a considerable degree of power in the relevant market (that is, they should be subject to a threshold). Such approach can of course be found in existing Directives – the “significant market power” doctrine. There are technical problems with the way in which it has been applied, but the concept is valid.

Section 1.  Response To Areas For Further Reflection

Question 1: Access to networks and digital gateways

A. with respect to networks (i.e. the local loop etc.) on which are the critical access issues and why (i.e. competition issues, consumer choice, consumer protection, creation of a favourable environment for investment etc.)?

• the extent to sector–specific principles and rules should be envisaged, in addition to any case–by–case application of the competition rules?

• in the event that such sector–specific principles and rules are necessary, which means would be appropriate and in what time frame (i.e. regulation, self–regulation etc)?

• what should be the scope of any sector–specific approach?

B. with respect to digital gateways (conditional access systems, EPG, APIs)

• which are the critical access issues and why? (i.e. competition issues, consumer choice, consumer protection, creation of a favourable environment for investment etc.)

• to what extent should sector– specific principles and rules be envisaged, in addition to any case–by–case application of the competition rules?

• what should be the scope of any sector–specific approach both in terms of the services (broadcast, non–broadcast) and the elements (set–top box, EPG, API) covered?

Regulation Of Access To Networks And Gateways

Gateways and bottlenecks

1.1 A service provider, wishing to provide its services to end–users of a particular network, may well need access not only to capacity on the network but also to key enabling services (which may or may not be provided by the network operator). Such enabling services are often referred to as “gateways”; conditional access services are a topical example of such a gateway. To simplify the drafting, this paper will also treat access to transmission capacity on a network as a “gateway”. A gateway, which a service provider must use in order to serve a significant number of customers, (i.e. it would not be economic to use another gateway) constitutes a “bottleneck”.

1.2 Some respondents to the Commission’s original consultation on convergence have argued for the approach adopted in the Advanced TV Standards Directive to be extended to provide a broader framework for access to networks and gateways. While the rationale for the introduction of that regulatory regime certainly applies elsewhere, Oftel believes that it does not represent the ideal model for other applications, for the reasons discussed in the next paragraph. (A fuller critique of the Directive is set out in Annex A.)

Generic rules

1.3 Oftel considers that the EU needs a generic approach to all questions of access across the converging broadcasting, telecommunications and IT sectors. The issues are diverse:

Conditional access services

Indirect access from mobile telephony networks

Access to broadband cable transmission capacity by third party service providers

Access to the telephony incumbent’s local loop for third party service providers

1.4 Oftel believes that Commission’s review must not focus on creating an access regime specifically for a defined set of gateways e.g. services delivered through set top boxes or integrated televisions. Generic rules are needed in order:

to ensure a coherent approach to regulation; and

to avoid obsolescence due to technical innovation or to changes in market structure.

Rationale for regulatory intervention

1.5 The general principle must be that there is no automatic presumption that service providers have the right for their services to be made available directly to end–users of a particular network. Where there is competition in the means to access end–users, network operators should have the right to decide what services are available over their networks. Customers can choose between network operators, and competition between network operators should result in the delivery of the full range of services to customers.

1.6 However, on occasions, a right of third party access can be in the public interest. This can be for cultural reasons – for example, the “must carry” requirement applied to cable TV networks in respect of public service broadcasters. There are certain characteristic features of communications networks, such as high switching costs or “calling party pays”, which mean that some of them are a bottleneck for the provision of some types of services. In addition, the capacity of these networks has in a number of cases been limited. If access to such bottlenecks were not to be regulated, there is the danger that there would be an undue restriction or distortion of competition in the provision of these services to end–users.

1.7 Most “gateways” in digital communications networks do not need special rules in addition to generic cross–sectoral legislation such as European competition law. Special rules may sometimes be justified for a variety of reasons, in particular where a “gateway” constitutes a “bottleneck”. But, as Oftel will argue below, not all bottlenecks justify ex ante regulation.

The right approach – is existing competition law sufficient?

1.8 European competition law is generic. The question which needs to be considered is whether it is sufficient to deal with the competition issues which will arise in this area. To resolve this question it is necessary to specify the objectives of any regulation.

1.9 Oftel’s set of objectives relating to anti–competitive effects of gateways are set out in Table 1.

Table 1:

1.10 Against these objectives, Oftel does not believe that reliance on action under the “abuse of dominance” test (Article 86 of the Treaty of Rome) is necessarily sufficient to ensure that the customer receives the best value for money and range of services in the long term. There are a number of reasons:

(a) intervention by the competition authority under Article 86 will not usually take place when a supplier has the ability to significantly harm competition in a final product market (i.e. is dominant in that, or a related, market) but only when such harm is manifest. While this avoids unnecessary interference, earlier intervention might, in some circumstances, be expedient to avoid intractable distortions to competition. The two scenarios below give examples where it is, at best, uncertain that intervention by a competition authority following an abuse of a dominant position will be sufficient to prevent distortion of competition or to restore the prospect of competition once it has been distorted:

(b) Article 86 remains uncertain in its application to situations where there are a small number of providers of a service. Legally, a finding that one supplier is “dominant”, or that two or more of them are “jointly dominant” may not be possible, notwithstanding significant distortions in either the market for the use of the facility (the gateway) or in downstream services market. Thus, where a service needs to pass through one of a small number of gateways (a fairly common occurrence in electronic communications markets), no individual gateway may be dominant in the conventional sense. However, it may also be the case that none of the gateways is prepared to grant access to a service provider on reasonable terms, thus placing it at a severe competitive disadvantage. Under these circumstances competition in the service in question may be being seriously distorted whilst action under competition law may not be possible. (Example: Network operators with a significant degree of market power, but short of dominance, refuse to allow access to their networks for the value–added services of a competitor.)

(c) Application of Article 86 remains uncertain where there are multiple gateways which can carry multiple services, but where the customer’s costs of changing gateways (i.e. the customers’ switching costs) are high compared to the value of any particular service provided through a gateway. Under these circumstances the owner of the gateway may be able to distort competition in any one service market while not having a conventional position of dominance. (Example: Digital television receivers will permit delivery of television programmes and interactive services. Once take–up of digital television has become widespread, there will be at least 3 gateways for delivering interactive services to a large number of consumers. But it may not be attractive for a consumer who has opted for equipment dedicated to one platform to change to another, in order to benefit from a better or cheaper range of interactive services.)

Additional tools for regulators

1.11 The circumstances described above may not arise often. But in Oftel’s experience, they do arise. Supplementary tools to deal with them could take the form of guidance on the interpretation of a “dominant position”, in respect of gateways in communications networks; and on definitions of abuse of such a position; or additional rules to deal with gateways having certain characteristics, notably where an operator with a degree of market power short of a dominant position is able to distort or restrict competition.

1.12 Guidance on interpretation is worth serious consideration. It may deal with many of the difficulties of the type outlined above. This would provide certainty for firms and regulators as to which situations should be subject to behavioural constraints and what those constraints would be. Greater certainty would reinforce the deterrent effect of the existing prohibitions in competition law and more clearly discriminate between firms with and without market power which may be abused. However, case law on the way in which Article 86 can be applied may not develop in the most appropriate way, to deal with some of the gateway issues which have been identified. To that extent, guidance may not represent the whole solution.

1.13 Further rules may then be considered necessary. In order to ensure a coherent regulatory system, Oftel believes that the methodological framework adopted by competition authorities is the appropriate one for designing such rules. That is to say, any special rules should provide for analysis of competition in all relevant markets and for advantages and disadvantages of intervention to be carefully weighed up.

1.14 Any such rules would need to be formulated with great care. Referring to the regulatory objectives outlined above, it would clearly be wrong to develop special rules which dealt satisfactorily with a few uncommon problems, if those same solutions caused problems in other much more common cases. The following difficulties (which are undoubtedly not exhaustive) will need to be taken into account:

• some gateways may represent bottlenecks to the provision of some services but not to others. While it is increasingly the case that services can be carried efficiently over different types of network, there are some services that can be deployed less flexibly and may require access to a particular network. In addition, some services deliverable over telecommunication networks may have close substitutes that do not need access to such networks (for example, “home banking” and “normal banking”).

• some services need to pass through multiple gateways. (For example, a pay–TV channel provider seeking to promote its services to cable customers needs both access to cable transmission capacity and to conditional access services.) In such circumstances, if it is justifiable to open one gateway, it is very likely to be appropriate to open all, and if not, it is unlikely to be appropriate to open any.

• in some cases the service provider has countervailing power in a related market. (For example, a vertically integrated broadcaster dominant in the provision of certain types of programming, seeking carriage on cable networks.) To open a gateway in such circumstances in the interests of promoting competition in one market may have the perverse effect of restricting competition to a greater extent in another market.

• It follows from the above arguments that Oftel believes that the threshold for possible intervention should be somewhat lower than the “abuse of dominance” test under Article 86. However, to guard against unnecessary interference in the workings of the market, Oftel suggests that special rules for regulating terms of access should not be considered except in the following circumstances:

• failure to apply the further rules would be likely to lead to an undue restriction or distortion of competition in a service passing through that gateway; and

• in the event of such a restriction or distortion, either abolition by the regulator would be inevitable at that stage or there would be a substantial risk that corrective action to restore competition in that service market would be impossible or disproportionate; and

• mandation of open access would not give rise to a material countervailing effect on competition in other services; and

• the benefits of additional sustainable competition in services using the gateway in question outweigh any reduction in incentives to develop facilities alternative to the bottleneck.

1.15 Despite the apparent generality of the tests, by no means all gateways will pass them. Oftel believes that most will fail the first test as competition is not being distorted or restricted. In practice the tests will be satisfied very infrequently outside the incumbents’ networks. Of those relatively few gateways passing the tests, most will be bottlenecks (that is, the operator would be regarded as dominant for competition law purposes). Some may correspond to a degree of market power short of dominance, for example where the operator’s market power was growing very quickly.

What kinds of rule?

1.16 Oftel believes the model adopted in the Advanced Television Standards Directive requiring access on fair, reasonable and non–discriminatory terms is an appropriate starting point. However the terms “fair and reasonable” implies detailed price regulation. For the reasons set out below we do not think that this is appropriate for all access issues. In our view the key aspects of the model which are appropriate for regulated bottlenecks are:

• No undue discrimination in granting access to the bottleneck

This rule prevents a gateway controller from preferring the service of one provider who needs to use the gateway to the detriment of the service of a competitor. In particular, it prevents a vertically integrated operator from preferring its own services. It will also be necessary to prohibit a vertically integrated operator from cross–subsidising the service passing through the gateway to avoid the appearance of discrimination.

• Rules to promote interoperability

Access to a network is useless if a service cannot work on that network. Familiar types of rule to promote interoperability will therefore be necessary, including rules to prevent anti–competitive exercise of intellectual property rights (see below).

• Obligation to co–operate in advance of provision of service

This is an important provision to prevent an operator with bottleneck control, exploiting such control by denying third parties access to the information necessary to enable them to launch services, if desired, at the same time as the operator.

Price regulation

1.17 Price regulation is unlikely to be appropriate prior to the gateway/bottleneck owner having a conventional dominant market position. Although individual pricing issues may arise, these are likely to be concerned with the distribution of the recovery of common costs across the different services going through the gateway/bottleneck. The undue discrimination rule (see above) should ensure that competition in any particular service market is not distorted by the actions of the gateway/bottleneck owner. Under these circumstances the regulator is unlikely to be in a position to be able to make a better decision than the bottleneck/gateway owner over the distribution of common costs, but can easily make a worse one

Gateways – summary of conclusions

1.18 Oftel believes that there may be a need for tools which supplement and complement European competition law in order to deal with competition issues arising from a relatively small number of gateways. Clear guidance on interpretation of Article 86 may be enough to deal with most problems. Where extra rules are appropriate, they will need to be constructed with some care to avoid unnecessary interference in the workings of the market, whilst forestalling monopolisation and distortion of competition through digital gateways. In order to achieve the right framework Oftel believes that the thoughts set out above need further development.

Access to networks and access to content

1.19 Oftel’s view is that a strategy for promoting competition between networks and in services over networks needs to address not only the issue of access to networks, but also the issue of access to content.

1.20 In some markets there may be competition between providers who not only maintain distinct networks, but also distinct and exclusive content. However, it is not clear that this model is viable in the long term for all markets (indeed in most of the markets where there is such competition all of the players are losing money). The economics of content services (especially broadcast content services) are that such services have very high fixed costs and very low (or zero) marginal costs. This means that network–specific services will carry higher unit costs and there are very strong economies of scale. Together with the effect of bidding wars for exclusive rights there is a tendency for competition in such markets to take on a “winner–takes–all” character.

1.21 Engendering viable competition in networks and services will mean addressing this issue. In the United States the approach that has been adopted is one where cable operators with vertically integrated channels are required to make these channels available to new entrants (mainly satellite). This approach requires price regulation. The de facto approach which has been adopted in the UK, is that premium channels are supplied by BSkyB to competing operators (cable companies and OnDigital, the main pay television digital terrestrial operator) on non–discriminatory terms.

Approaches to interoperability

1.22 With the proliferation of networks, interoperability increasingly becomes an issue, especially for co operative services i.e. those requiring interconnection. By interoperability we mean the ability of a customer to use a service because terminals, networks and other systems involved in the connection/session interconnect and interact in a compatible and predictable way to deliver the wanted service.

1.23 The interactions necessary to achieve interoperability are also becoming more complex. Interconnection and interoperability have traditionally been horizontal issues for public networks providing basic voice and data services. Standards in this area are frequently addressed by ETSI. In the emerging convergent information and entertainment services industry, interworking issues mainly arise from the need for compatibility between players at different levels in the value chain, with technical control creating the potential for the creation of gateway control over the delivery of services.

1.24 Concern about creating interoperable networks has lead to calls for regulators to be given more power to intervene in the market to set standards. It is Oftel’s opinion that these are best developed by the industry players themselves. Oftel believes that it is the regulator’s task to ensure that a particular technology is not foisted upon all players by one operator leveraging its market position into other markets. In the UK, interoperability between and across platforms is a significant issue in relation to set top boxes and integrated televisions. Particularly as each of the platform operators (digital satellite, terrestrial and cable) have chosen different Conditional access systems (‘CA’) Electronic Programme Guides (‘EPG’s) and Application Program Interfaces (‘APIs’). Although solutions can be found to interoperation between different CA systems (simulcrypting and multicrypt) more difficult issues are raised by incompatible APIs and the integration of all three elements with no clear interface between them. These concerns stem from a tension between maintaining the stability of the traditional TV environment whist utilising the benefits and technological advances that can be culled from the PC world. It would be wrong however to concentrate solely on the interoperability issues raised by digital television: equally important are the issues raised by fixed mobile convergence and the increased use of software across telecoms operators networks.

1.25 The Commission therefore needs to construct a framework that allows for flexibility whilst addressing the needs of a variety of networks. In doing so Oftel urges the Commission to address four main issues:

(i)     Identify a clear rationale for intervention
(ii)    Who should intervene – regulation or self–regulation?
(iii)   Timing– if intervention is necessary when should it take place?
(iv)   Method of ensuring interoperability – is standardisation appropriate?

Rationale for intervention

1.26 Intervention in the communications market by setting standards has played an important role in ensuring interoperability and the creation of a harmonised market for equipment, leading to economies of scale. However standardisation also has drawbacks. By closing off technological variation, it can limit the potential for competitive differentiation of service and, as standardisation can be a lengthy process, it can slow down the initial pace of innovation. It is necessary to strike the balance between encouraging, or even mandating standards on the one hand, and promoting competition and innovation on the other.

1.27 Only if the benefits from intervention clearly outweigh the potential adverse effects should standards be imposed on the market. Regulatory intervention may be justified in order to counter the effects of dominance.

Who should intervene?

1.28 Interoperability can be delivered in several ways:

• By voluntary agreement;

• By the impact of a dominant player or cartel;

• By regulatory mandate.

1.29 Voluntary agreement – Oftel believes that increasingly interoperability will be based on voluntary agreements within the industry. As with the globalisation of services and the drive for standards which are timely and focused on market needs, it is less likely that the necessary standards will come from traditional regional or international standards bodies. Such bodies developed to meet the needs of national telephone networks to interwork on a worldwide basis. In the emerging convergent information and entertainment services industries, standards and the important pre–standardisation activities are more likely to emerge from voluntary industry consensus groups such as DVB, DAVIC, The ATM Forum and the Internet Society’s Internet Engineering Task Force (IETF).

1.30 These consensus groups emerged to counter the main objections to formal standards bodies, namely their lack of speed and commercial prioritisation. There is also a tendency for formal standards bodies to have an agenda of their own and seek to create standards in areas where the market might not desire to use the co–operative approach or create standards at all. The objectives of traditional standards bodies, such as ETSI and the ITU, should be to collaborate with such consensus groups to exploit their complementary strengths. One such strength is the continuity and wider recognition that flows from formal standards, coupled with the speed and market focus that comes from consensus bodies. The Commission has an important role to play in encouraging such co–operation.

1.31 There are certain drawbacks to the consensus approach. Consensus groups only occur when there is a common recognition of the benefits of Interoperability, which may not coincide with the time frame that consumers may wish. They can become a cartel unless their membership is open to all and the decision–making processes are seen to be transparent and fair. The Commission has a significant role to play in encouraging the development of such groups where it identifies a public policy need to ensure interoperability, backed up where necessary with the threat of regulatory intervention. A condition for acceptance by the Commission of a self–regulatory approach should be that membership is open and voting rights are fair.

1.32 Impact of a dominant player or cartel – The main obstacles to the voluntary approach is that a consensus can be undermined by standards imposed by a dominant operator which become the de facto standard for a given service or application. This outcome can be either benign or malign – or various shades in between. Regulatory intervention may be justified to prevent those with market power from imposing their own proprietary standards on the wider industry where this raises others’ costs, prevents or impedes market entry or otherwise distorts fair competition.

1.33 Regulatory mandate – This does not mean that regulators should set standards. Oftel believes that the Commission should consider the concept of interface control. This has three key aspects:

• mandatory publication of standards for all;

• mandatory consensus–seeking process for operators with market influence

• backed by discretionary powers for the regulator to intervene if this fails.

1.34 This concept was established with the UK implementation of the Revised Voice Telephony Directive (Directive 98/10/EC). A key characteristic of regulation of telephony interfaces is the requirement for transparency. All operators are required to publish technical specifications of interfaces between interconnected networks and between networks and customer premises equipment – ahead of launch of services over them. This ensures that operators have sufficient notice to ensure interoperability of their system if they wish.

1.35 Interface control is designed to prevent an operator with market influence from abusing it. Market influence in this context means the ability of an operator to influence unduly either the costs or timescales (or both) of other operators and equipment suppliers in implementing interfaces. To prevent this abuse operators who are determined by the Director General to have interface control are required to consult with the industry on their proposed interface prior to publication, where interfaces do not conform to recognised standards. Oftel also has the power to determine interfaces (essential interfaces) in the event that this consultation fails to establish a consensus or disputes are referred by operators. The power to specify an essential interface pre–dates Directive 98/10/EC and is contained in all relevant licences. Oftel considers that these concepts could be broadened and used in relation to other networks such as set top boxes and integrated televisions.

Timing and method of intervention

1.36 It follows from what is set out above that Oftel believes that the regulator should generally only intervene if industry groups cannot reach a consensus or because a dominant operator is abusing its position. Regulators should not normally intervene in a new market using new technologies, where the price of early intervention could be the stifling of innovation and the delivery of new services to consumers. If intervention is necessary Oftel believes that seeking to impose a single standard is increasingly unlikely to be the correct approach for a regulator. The regulator’s role should be to facilitate industry co operation and to police anti–competitive behaviour. Although there may be situations where the implementation of a proprietary standard may bring greater net benefits than requiring the industry to co–operate on a new consensus standard. In such situations, interface declaration becomes more important, as would be the transparent and non–discriminatory licensing of any IPR.

Intellectual property rights

1.37 Intellectual property rights – whether the rights to the live broadcast of a football match or set top box software are of critical importance to competition in these new and developing markets. There is the danger that such rights can provide the source of market power and can be abused. But they are also the engine of development and innovation. There is therefore a balance to be struck. The distinctions between firms with market power and those without and between the legitimate and illegitimate use of market power will be fundamental to finding the balance. We suggest that the licensing scheme set out in the Directive 95/47/EC is a useful starting point, subject to the amendments we suggest in Table 1.

Other issues

1.38 The rules set out above do not however deal with all issues of concern: in particular they do not address issues of consumer access to networks or consumer protection from both harmful content and misleading claims by competing equipment manufacturers. Such issues will be of increasing importance. In its previous response Oftel put forward a number of proposals on these issues which made it clear that the solutions to some of these concerns do not always require regulatory intervention, although it may well require a strengthening of general consumer protection law and a public awareness program about the ways in which consumers can harness some of the control functions inherent in new technologies. The principles behind such Public policy objectives are dealt with in more detail in Section 3.

Section 2 – Creating the framework for investment and innovation

Question 2: Creating the framework for investment and innovation

(A) Views are invited on the evolution and promotion of European audio–visual content

production, distribution and availability in a digital environment?

No comment

(B) Views are also invited on:

(i) the extent to which and (ii) the way in which the regulatory framework should take account of the level of investment required to establish digital platforms, networks and services?

2.1 Consumer and investor confidence depends on the existence of a consistent and coherent regime for the regulation of an increasingly competitive market. The increased competitiveness of the market however will have impacts on the key players’ strategies as the markets they attack and the alliances and mergers they undertake change. The loss of market share will force the national PTOs to look for growth opportunities – both new products and new geographical markets. National PTO’s will continue to enter other geographical markets as second carriers.

2.2 Many telecom companies believe that in order to attract the business of multinational companies who seek an end to end streamlined service telcos themselves need to develop into multinationals to meet these needs, either via organic growth or increasingly through joint ventures and mergers. Evidence for this view can be found by looking at the development of several world alliances notably Concert, World Partners & Unisource and Global one. These global alliances have yet to become successful. The recent BT/AT&T link up indicates that despite this lack of success there is a belief that given the right partners these alliances and mergers will succeed and are vital for a telecom company to remain competitive. In addition they will look to expand into new product areas such as multi media and broadcasting. However skills required to succeed in these markets do not necessarily reside in large ex–monopolists. Thus it can be expected that the national PTOs will forge links or undertake mergers with other companies more suited to these markets (i.e. links between telcos and software companies and/or broadcasters). Fixed mobile convergence will result in more agreements between fixed and mobile operators and possibly mergers.

2.3 These trends indicate that Oftel may become involved in more merger/JV issues in the coming years. It also illustrates that individual NRAs by themselves may not have the power to control these multinational companies and thus co–operation and a commonality of objectives both within Europe and between Europe and the US regulatory bodies will be important.

2.4 Just as the companies’ strategies are changing there are calls for a change in the regulatory approach to mergers and joint ventures on the basis that the investment in technologies are so large, particularly digital technology, that companies need to be ‘big’ in order to succeed. Oftel would caution the Commission against accepting such a view.

2.5 Oftel considers that a key objective of the regulatory framework for access to networks and digital gateways should be to encourage efficient investment in services and network infrastructure. This is best achieved by creating a stable regulatory environment which imposes minimum barriers to entry and which focuses clearly on those aspects of access issues which require specific regulatory measures.

2.6 Oftel does not consider that there is a sound case for amending the regulatory framework for access to networks and digital gateways to take account of the level of investment required. Oftel considers that companies are able to raise sufficient finance for investment in response to commercial opportunities. Investment may require combining of the resources or experience of one or more existing firms, for example to spread risk or to pool expertise and access to finance, such as in the case of BIB. However, consideration of the merits of such combinations may be addressed under competition law, which requires the balancing of the benefits to consumers from facilitating investment against the risks arising from potential reductions in competition.

2.7 Oftel believes that the Commission has a vital role to play in encouraging investment in new technologies by ensuring that the regulatory framework avoids unnecessary burdens on new entrants while retaining vigorous controls on anti–competitive behaviour by incumbents. Although there can be no guarantee that a modified regulatory system would of itself encourage investment an unduly restrictive one clearly risks acting as a disincentive. There is a marked difference between the willingness in the US to invest in new technology start–ups and within Europe. Oftel believes that by adopting such an approach the Commission assists existing EU initiatives like the ETNAS project (The European New Technologies Appraisal Service) whose purpose is to assist financial institutions to understand (and realistically assess) technology business propositions to create a more positive investment climate.

Section 3 – Ensuring a balanced approach to regulation

Question 3: Ensuring a balanced approach to regulation

a. Which principles and measures will be the most appropriate (taking into account the nature of the service, its pervasiveness, and technical characteristics, as well as the public interest considerations at stake, including consumer protection matters) for achieving the right balance between securing such public interest objectives pursued and facilitating the development of open competitive markets, and what is the time frame in which they should be introduced.

3.1 In Oftel’s previous response to the Commission’s Green Paper we set out a number of potential public interest objectives informed by our experience of the UK market, and a framework in which they could be implemented. We do not repeat those points here. Instead we concentrate on the criteria for establishing a legitimate public interest objective.

3.2 This question asks about the principles which should lie behind the establishment of legitimate “Public Interest Objectives”, and about the measures established to achieve them. It is right to address the two issues separately.

3.3 Public Interest Objectives is a wide label. The only reason for intervening in the market (whether it be telecommunications, broadcasting, IT or a converged communications market) is in order to secure a public interest objective which cannot be secured by the ordinary workings of a competitive market. However, this response will assume that “Public Interest Objectives” are those which go beyond competition regulation, price control and regulation of interfaces and Interoperability which have been discussed above.

Principles

3.4 Principles might be developed to establish a legitimate basis for “Public Interest Objectives”. For example: In order to be a legitimate “Public Interest Objective”, the objective should aim to deliver:

• a service which is essential for economic or social participation; or

• a service which is desirable and which is available to (or used by) the overwhelming
  majority of the population, but is not available to all; or

• a service, which is believed to be desirable in the broader economic or social context, availability and take up of which, should therefore be encouraged.

3.5 The first two are more easily identifiable than the latter, which is largely a political judgement. In addition, action to achieve the “Public Interest Objective” should only be taken if:

• The service is not currently provided or is not likely to be provided by open competitive markets; and

• The “Public Interest Objective” is not met by existing non–sectoral rules; and

• The service is affordable.

3.6 The above has been drafted in terms of services but can also be applied to content regulation and consumer protection.

Measures

3.7 Assuming that a Public Interest Objective has met the above test, separate consideration has to be given to the appropriate measures which can be put in place to achieve the objective. Again, a number of tests can be devised. For example: the measures taken to achieve a specific Public Interest Objective:

• should be proportionate, transparent and fair; and

• should be compatible with the relevant regulatory regime; and

• should stress the objective/service to be achieved rather than the technology to be used; and

• should be funded by the industry (and, therefore, by existing customers) only where there are clear benefits to the industry.

b. Whether criteria can be identified which will ensure that sector–specific rules are proportionate, in the sense that they take account of the nature of the service concerned and the legitimacy of the public interest objectives pursued;

3.8 It is difficult, if not impossible, to establish totally rigid criteria in such circumstances, and across all Member States, but the principles set out above go some way towards ensuring that an appropriate framework is established for making these decisions.

3.9 Oftel considers that the appropriate model is one in which the principles and broad objectives are established at EU level together with the vires for the use of a variety of policy tools, but it is left to Member states to decide the precise objectives and to select which of the various tools, if any, they wish to use to achieve those objectives. Ultimately, such decisions will have a large political element, depending on the social and economic characteristics of each country, and should not be stifled by inappropriately rigid criteria.

3.10 However it is clear that the way in which certain public interest objectives are implemented can become a barrier to the development of competition e.g. if a Universal Service Fund places unfair burdens on new entrants. To avoid unnecessary barriers to entry the Commission could play a useful role in setting objective criteria for implementation across Member States. The criteria suggested above draw from existing European principles which could be built upon whilst respecting the right of individual Member States to choose which objectives to pursue. In particular the use of “benchmark” tests like that contained in the Licensing Directive, which seek to limit the imposition of unnecessary burdens on operators by requiring that licence conditions must be proportionate, transparent and fair, could be explored.

c. Areas in which self–regulation could play a role in achieving this balance, and who should participate in setting up and implementing the relevant mechanisms?

3.11 Self–regulation by the industry can be a useful tool to achieve “Public Interest Objectives” and, in areas where the industry is already taking voluntary measures, it may well be that regulatory action is unnecessary and inappropriate (see the response to 3a, above).

3.12 In other areas a voluntary initiative by the industry can forestall the need for regulatory action. It can be effective to make a clear statement of the Public Interest Objective and then let the industry take ownership and responsibility for finding solutions.

3.13 However, there are still a number of roles for the Government/Regulator to take:

• establishing the “Public Interest Objective”;
• determining whether self–regulation is appropriate in each case;
• Regulators may have a mediating or facilitating role in the self–regulatory process;
• Regulators need to monitor whether the Public Interest Objective is being met and assess the implications if it is not;
• Regulators or Government need to have the power to step in if self–regulation proves ineffective.

3.14 The latter power is important. The threat of regulatory intervention can have an incentive effect on the industry to solve the problem and mean that such intervention ultimately becomes unnecessary. It is also important to ensure the timely delivery of certain objectives.

3.15 One of the best examples of the need for a balanced approach to industry and regulatory solutions is in relation to consumer protection. The purpose of the regulator is to protect the interests of the consumer. But we believe that protecting consumers’ interests can be delivered in a number of ways. In our experience it is not always necessary to have detailed prescriptive rules in order to meet this objective.

3.16 A particular example is consumer information. Consumers – residential and business – need adequate levels of information in order to obtain the benefits of increasing competition in the telecoms market. And for the market to grow competitors need consumers to have sufficient confidence in the information available. Information available to consumers needs to be:

• Meaningful
• Relevant
• Accurate
• Timely
• Unbiased

3.17 This is especially so for telecoms and other electronic communications services where customers will often purchase without trialing the service and where it is difficult for them to predict in advance the bills that they will actually pay. Various European Directives recognise this concern, notably Directive 98/10/EC. However Oftel believes that in certain circumstances the Directives can be too prescriptive. This issue will be pursued in the context of the 1999 Review.

3.18 With regard to customer information the UK experience of recent years illustrates, within an overall aim of minimal regulation necessary, that a mix of approaches that have been successful ie the range involves:

(i) direct industry response to public concern (with the Regulator playing only a facilitating role)
(ii) industry initiative encouraged by the possibility of regulatory action
(iii) regulatory action to improve information flows and transparency.

Examples of UK Industry Schemes:

Internet Watch Foundation

In the UK it was clear that there was growing concern at the nature of some of the material available on the Internet. Following discussions between the police and Internet service providers, an industry self–regulatory body, the Internet Watch Foundation, was established to try to devise methods to meet those concerns. This approach has been emulated in the EC’s Action Plan on promoting the safer use of the Internet.

Disconnections Policy

A good example of the way in which voluntary action by the industry can be effective and where it is not always necessary to use formal regulation is the issue of disconnections policy in the UK. Oftel was concerned by the high level of disconnection for overdue payments within the industry and entered into discussions to see if changes to procedures could be introduced which would reduce the number of unnecessary disconnections. This led to the development of a policy which has now been adopted across the industry whereby customers with outstanding debts are contacted and offered the possibility of a repayment plan accompanied by an outgoing calls barred (OCB) service. This is now established and seems to be working well. Although Directive 98/10/EC also addressed this issue, measures in the UK were established outside a formal legal framework.

Comparable Performance Indicators

Oftel has also encouraged voluntary industry approaches to improving information to customers, e.g. Comparable Performance Indicators for quality of service, with some success.

Market Information

Oftel has also sought to create a climate of greater transparency by publication of market information collected from telecoms companies (under regulatory powers). The Commission has an important role in foster this climate of openness throughout Europe against the backdrop of the threat of detailed regulation if the industry fails to address these concerns.

Although the success of these schemes has often depended on a regulatory or legislative backstop power to impose such obligations, in the event that the industry fails to deliver a solution, this co–ordinated approach with the government or regulator identifying a policy objective but leaving it to the industry to implement, it has proved to be a useful strategy.

3.19 At EU level, the framework to support this mixed approach needs to exist through:

– Directives which provide NRA with the flexibility to follow the most appropriate route in each case;

– the EU itself establishing, fostering and encouraging a climate of openness and transparency in terms of individual regulators’ actions and decisions and information flows.

The Commission could also usefully assess industry schemes in various Member States to see whether they demonstrate that consumers are receiving adequate protection, and, if they are, to facilitate their adoption in other Member States.

Annex A

Advanced Television Standards Directive (Directive 95/47/EC)

Although Directive 95/47/EC contains conditions dealing with the issues set out above, in order for those conditions to be applied more broadly certain key changes would need to be made: