Annex B Draft Licence Modifications
Annex C Draft Code of Practice on Directory Information
Annex D Market Definition and Barriers to Entry
Annex E Charges for Directory Information
Annex F Structure of Charges and Principles of
Cost Recovery
A1 The Director General of Telecommunications has a statutory duty, which is shared with the Secretary of State, (under Section 3 (1) (a) of the Telecommunications Act) to ensure that there are provided throughout the UK directory information services to satisfy all reasonable demand. A directory information service is defined in the Telecommunications Act as a service consisting in the provision of directory information over a telecommunications network in order to facilitate use of that network.
PTO LICENCE OBLIGATIONS
A2 Provision of directory information services to customers is covered by licence obligations falling on all PTOs. Each PTO must as a condition of its Telecommunications Act licence:
A4 The obligations to provide a directory information service and published directories do not apply when the directory information requested relates to customers who have requested not to be listed in directories.
VOICE TELEPHONY DIRECTIVE (VTD 96/52/EC on the application of open network provision (ONP) to voice telephony)
A5 Article 16 of the Voice Telephony Directive requires that:
"Subject to the requirements of relevant legislation on the protection of personal data and privacy, national regulatory authorities shall ensure that:
(a) directories of all subscribers to the voice telephony service are made available to users in either printed or electronic form, and are updated on a regular basis;
(b) users have a right to have or not to have an entry in publicly available directories;
(c) telecommunications organisations make available on request public directory information concerning the voice telephony service on published terms which are fair, reasonable and non-discriminatory".
A6 For the purposes of this Directive, BT and Kingston Communications are treated as telecommunications organisations to whom Article 16 applies.
(PROPOSED) AMENDING VOICE TELEPHONY DIRECTIVE (AVTD) (Directive on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment)
A7 The draft text of Article 6 which covers directories is as follows:
"1. The provisions of this Article are subject to the requirements of relevant legislation on the protection of personal data and privacy, such as Directive 95/46/EC [the Data Protection Directive] and Directive 97/.../EC (to be adopted) [the Data Protection in Telecommunications Directive]
2. Member States shall ensure that:
(a) subscribers have the right to have an entry in publicly available directories, and to verify and if necessary correct or request removal of that entry;
(b) directories of all subscribers who have not expressed opposition to being listed, including fixed, mobile and personal numbers, are available to users in a form approved by the National Regulatory Authority whether printed or electronic, or both, and are updated on a regular basis;
(c) at least one telephone directory enquiry service covering all listed subscribers numbers is available to all users, including users of public pay telephones.
3. In order to ensure provision of the services referred to in paragraph 2(b) and 2(c), Member States shall ensure that all organisations which assign telephone numbers to subscribers meet all reasonable requests to make available the relevant information in an agreed format on terms which are fair, cost oriented and non-discriminatory.
4. Member States shall ensure that organisations providing the service referred to in paragraph 2(b) and 2(c) follow the principle of non-discrimination in their treatment and presentation of information provided to them".
A8 Under the proposed AVTD provision of printed directories, electronic directories and directory enquiry services may be financed through a universal funding scheme for sharing the financing of these services where they cannot be commercially provided. Oftel's policy on the provision of universal service and the funding of it is set out in its Statement, Universal Telecommunications Services, published in July 1997. Where the obligation to provide services, such as directory information services, falls on all PTOs Oftel considers that there is no need to establish a funding mechanism to share any net universal service cost, if there is such a cost, of providing these services. Under Oftel's proposals in this document the obligation to provide directory information services will continue to fall on all PTOs and therefore issues of universal service funding for directory information services do not arise.
DATA PROTECTION ACT, 1984 (DPA)
A9 See Chapter 4, Section B for details. The eight Data Protection Principles set out in the Data Protection Act are as follows:
1. The information to be contained in personal data shall be obtained, and personal data shall be processed, fairly and lawfully.
2. Personal data shall be held only for one or more specified and lawful purposes.
3. Personal data held for any purpose or purposes shall not be used or disclosed in any manner incompatible with that purpose or those purposes.
4. Personal data held for any purpose or purposes shall be adequate, relevant and not excessive in relation to that purpose or those purposes.
5. Personal data shall be accurate and, where necessary, kept up to date.
6. Personal data held for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes.
7. An individual shall be entitled -
(a) at reasonable intervals and without undue delay or expense -
(i) to be informed by any data user whether he holds personal data of which that individual is the subject; and(b) where appropriate, to have such data corrected or erased.(ii) to access to any such data held by a data user; and
8. Appropriate security measures shall be taken against unauthorised access to, or alteration, disclosure or destruction of, personal data and against accidental loss or destruction of personal data.
DATA PROTECTION DIRECTIVE, 1995 (DPD95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data)
A10 The Government is introducing new primary legislation on data protection to implement the Data Protection Directive. This new legislation is expected to take effect from October 1998. The Data Protection Directive goes beyond the DPA in a number of respects. In particular it:-
A11 Article 11 is of relevance to the proposals in this document. This requires that where a data user obtains data from a third party rather than directly from the data subject, the data user provides certain information including his identity to the data subject, unless the data subject already has it. This would, for example, apply to PTOs and independent service providers receiving directory information from an interconnecting PTO. Clearly it would be a substantial barrier to entry in the provision of directory information services if all customers needed to be recontacted in such cases. However, the Directive provides a number of exemptions from this requirement. One such exemption is where recording or disclosure of data by the data user is expressly laid down by law. This exemption would cover PTOs who are required by licence to use directory data obtained from other PTOs to provide directory information services. Another exemption is where provision of such information involves disproportionate effort. Oftel considers that recontacting all customers to obtain permission to use their directory information in ways that they had already consented to would be likely to be deemed to involve disproportionate effort and therefore it is likely that independent service providers obtaining directory information for use in ways that customers already anticipated could take advantage of this exemption. To take advantage of these exemptions Member States must provide appropriate safeguards. The proposed Code of Practice on uses of directory information will provide safeguards against misuse.
(PROPOSED) DATA PROTECTION IN TELECOMMUNICATIONS DIRECTIVE (Directive concerning the processing of personal data and the protection of privacy in the telecommunications sector, in particular in the integrated services digital network (ISDN) and in the public digital mobile networks)
A12 The draft text of Article 11 which covers directories of subscribers is as follows:
"1. Personal data contained in printed or electronic directories of subscribers available to the public or obtainable through directory enquiry services should be limited to what is necessary to identify a particular subscriber, unless the subscriber has given his unambiguous consent to the publication of additional personal data. The subscriber shall be entitled, free of charge, to be omitted from a printed or electronic directory at his or her request, to indicate that his or her personal data may not be used for the purpose of direct marketing, to have his or her address omitted in part and not to have a reference revealing his or her sex, where this is applicable linguistically.
2. Member States may allow operators to require a payment from subscribers wishing to ensure that their particulars are not entered in a directory, provided that the sum involved is reasonable and does not act as a disincentive to the exercise of this right.
3. Member States may limit the application of this Article to subscribers who are natural persons".
DIRECTORY INFORMATION
Conditions in italics apply to BT and Kingston only.
Condition X.2(c) applies to BT only.
X.1 The Licensee shall provide a directory information service on request to any customer to whom it provides voice telephony services enabling that customer, in accordance with the Code of Practice, to ascertain any Number as defined in Condition [34B] allocated under a Numbering Plan as defined in that Condition.
X.2 Where the Licensee provides switched telecommunication services by means of any Applicable System which is connected directly or indirectly to another public telecommunication system in the United Kingdom (the "Other System") by means of which switched telecommunication services are provided the Licensee shall:
(a) ensure that the directory information made available by the Licensee includes all directory information supplied to the Licensee by the operator of the Other System; and
(b) supply on request to the operator of that Other System or to any Service Provider, directory information about the customers of the Licensee or of any person to whom the Licensee has allocated blocks of Numbers for re-allocation for the purpose of enabling the operator or Service Provider to use that information in accordance with the Code of Practice and to do so in a form required by the operator or Service Provider for those purposes and such as complies with the Code of Practice; and
(c) provide on request to the operator of that Other System or to any Service Provider for the purpose mentioned in paragraph X.2(b) on-line access to the database which the Licensee uses to provide a directory information service and the contents of the database in machine readable form which the Licensee uses to compile directories.
Following a representation by the Licensee that the markets for such databases are competitive, the Director shall determine whether they are competitive. If the Director determines that they are competitive then paragraph X.2(c) shall cease to have effect.
X.3 Where the Licensee is requested to supply directory information in accordance with paragraph X.2(b) [or X.2(c)] the Licensee shall be entitled to make a reasonable charge for doing so and shall be entitled to refuse to do so unless:
(i) the operator or Service Provider undertakes to use the information only in accordance with the Code of Practice; and
(ii) the supply by the Licensee of the information is lawful and the Licensee is not in particular required to do anything contrary to the Data Protection Act 1984 as amended or replaced.
X.4 The Licensee, when rendering a bill of any description which includes a charge for publishing and making available directories generally to persons to whom the Licensee provides switched telecommunication services, shall include the amount of such charge in that bill separately from any other charge included in it.
X.5 Where the Licensee generally includes in bills rendered by it in respect of voice telephony services a charge for the provision by the Licensee of directory information services or for the supply of directories, the Licensee shall, at the request of any Service Provider who has himself provided directory information services or supplied directories to any person, render on behalf of that Service Provider to that person a bill for such provision or supply and account to the Service Provider for any amount received by the Licensee in respect of that bill. The Licensee shall be entitled to make a reasonable charge to the Service Provider for rendering such bill.
X.6 Charges made by the Licensee as referred to in paragraph X.3 [and X.5] shall be published by the Licensee in such manner and at such times as shall be determined by the Director.
X.7 Where the Licensee provides switched voice telephony services by means of any of the Applicable Systems which is connected to an Authorised Overseas System by means of which such services are provided, then, if a directory information service is provided by means of that Authorised Overseas System in respect of that Authorised Overseas System, the Licensee shall provide to any customer information as to how that customer may avail himself by means of that Applicable System and that Authorised Overseas System when connected together of the directory information service provided in respect of that Authorised Overseas System and shall take all reasonable steps to secure that can be done.
X.8 Where the Licensee provides switched voice telephony services by means of any of the Applicable Systems which is connected to both:
(a) an Authorised Overseas System by means of which such services are provided; and
(b) a Connectable System in the United Kingdom by means of which such services are provided which is run under a licence which does not authorise the connection of that system to a system outside the United Kingdom so as to convey Messages from the United Kingdom to a place outside the United Kingdom.
it shall not unreasonably refuse to provide to the operator of that Connectable System access to such directory information services relating to the Authorised Overseas System as the Licensee makes available to those to whom it provides voice telephony services.
X.9 The directory information service provided by the Licensee under paragraphs X.1 and X.7 and the information made available under paragraph X.2(a) shall include a service or information as the case may be satisfactory to the Director whereby directory information is made available in a form which is appropriate to meet their needs to persons in the Licensed Area who are so blind or otherwise disabled as to be unable to use a telephone directory in a form in which it is generally available to persons to whom the Licensee provides services; and the service so provided to such persons shall from the date on which the Licence enters into force be provided free of charge or, if the Director is satisfied that it is not practicable, the Licensee shall provide, in accordance with arrangements agreed with the Director, appropriate reasonable compensation in respect of charges that are paid.
X.10 The Licensee shall comply with the Code of Practice and shall secure that those to whom it supplies directory information undertake to use the information in accordance with that Code.
X.11 This Condition operates without prejudice to Condition [the Condition dealing with the connection of systems providing connection services].
X.12 In this Condition -
(a) "Code of Practice" means the Code of Practice drawn up by the Director in consultation with the Data Protection Registrar and other interested parties which sets out the permitted uses which may be made of directory information;
(b) "directory information" means such information about a customer as is permitted to be used in accordance with the Code of Practice and is compiled in such form as is so permitted;
(c) "Service Provider" means any person who is in the business of providing or securing the provision of directory information for the purpose of facilitating the use of a service provided by another person consisting in the conveyance of Messages by means of a telecommunication system.
(1) INTRODUCTION
(2) PURPOSE
(3) DEFINITIONS
(4) DIRECTORY STATUS CLASSIFICATIONS
(5) PERMITTED USES
(6) OTHER USES AND PROCESS FOR OBTAINING CUSTOMER CONSENT
(7) SUB-LICENSING DIRECTORY INFORMATION
| 1. INTRODUCTION | Explanatory notes and guidelines |
| 1.1 All Public Telecommunications Operators (PTOs) and other licensees (Other Licensees) issued with a licence under Section 7 of the Telecommunications Act which are entitled to direct allocations of numbers are required to follow the Code of Practice (the Code) as a condition of their Telecommunications Act Licence. The Code sets out permitted uses of directory information relating to business and residential customers and specifies the directory information that PTOs/Other Licensees must collect from their customers and supply on request. | |
| 1.2 The Code has been drawn up by the Director General of Telecommunications (the Director) in consultation with the Data Protection Registrar (DPR) and other interested parties. | |
| 1.3 PTOs/Other Licensees are required to follow the Code in the use they make of directory information about their customers and the customers of other operators. PTOs/Other Licensees must put in place agreements with those to whom they supply directory information to require the recipients of directory information to abide by the Code. | |
| 1.4 There is some commonality in the categories of data used for directory services with data collected by PTOs/Other Licensees from their customers for other purposes. The Code does not apply to information which PTOs/Other Licensees may collect from their customers for other purposes, including information used for the provision of emergency services databases. | 1) A distinction needs to be drawn between data held on PTOs' customer databases, data held on the emergency services databases and directory information. All three will include the customer's name, address and telephone number (although the address and phone number on the emergency services databases may be different from that held for directory purposes). |
1.5 The Director may review the Code from time to time.
Revisions to the Code will only be made by the Director following consultation
with:-
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2) The Code may need to be reviewed to take account of changing customer expectations and / or changes in technology. |
| 2. PURPOSE
2.1 The purpose of the Code is to: (a) Provide clear rules about the uses of directory information to address the privacy concerns of residential customers about how their directory information is used. |
|
| (b) Ensure that all those using directory information to
provide services and products to customers are subject to a common set
of rules.
(c) Set out the directory status classifications which PTOs/Other Licensees must offer their customers. (d) Set out what directory information PTOs/Other Licensees must supply on request. [A functional specification will be drawn up setting out detailed requirements] |
3) The purpose is to create a level playing field in terms of how the information can be used. For this reason the Code covers business as well as residential directory information. |
| 3. DEFINITIONS
3.1 For the purposes of the Code the following words and phrases will have the meaning set out below. |
|
| 3.2 "Batch directory enquiry services" involve
the provision of telecommunications numbers in bulk to append to lists of names and addresses. |
|
| 3.3 "Business record" is a directory record for an individual, partnership, body corporate or statutory body which is recorded by a PTO/Other Licensee as in a business category. | |
| 3.4 "Customer" is any residential or business customer whose data forms a directory record | |
| 3.5 "Data user" is a person or organisation processing directory information to produce directory services and products. | |
| 3.6 "Directory information" consists of directory records collected from customers by PTOs/Other Licensees. | |
3.7 "Directory record" consists of information on an individual
customer which PTOs/Other Licensees must collect and supply on request
in accordance with the functional specification. Each directory record
comprises the following fields of information:
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|
| 3.8 "Directory status classification" is the classification which signifies how a directory record may be used in accordance with the rules set out in this Code. | |
| 3.9 "Matching records" is the number of directory records generated from a single search. | |
| 3.10 "Residential record" is a directory record which is recorded by a PTO/Other Licensee as in a residential category. | |
| 4.
DIRECTORY STATUS CLASSIFICATIONS
4.1 With effect from [date to be agreed] each PTO/Other Licensee will offer residential customers the following directory classifications. These classifications will form part of all new residential records from [date to be agreed]. |
4) This section has been drafted on the basis of the proposals for directory status options in Chapter 5. |
| (a) "Full listing" - a directory status classification signifying that the directory record may be used for all services and products in Section 5 of the Code. | |
| (b) "Directory enquiry services only listing" - a directory status classification signifying that the directory record may be used for voice directory enquiry services only. | |
| (c) "Directory enquiry services with call completion listing" - a directory status classification signifying that the directory record may be used only for voice directory enquiry services where the enquirer is directly connected without disclosing the called party's number and the called party has the option of accepting the call. | |
| (d) "Ex-directory" - a directory status classification signifying that the directory record may not be published in directory information services and products. The PTO/Other Licensee may only supply the customer's name and address to providers of voice directory enquiry services. No telecommunications numbers may be disclosed. Such directory records may only be used to confirm that the customer is ex-directory for voice directory enquiry services. | 5) See Chapter 4 for options for the treatment of ex-directory information. This will need to be reviewed in the light of responses to the consultation. |
| (e) "Partial address option" - a directory status classification signifying that a customer has chosen to have only part of his / her address listed. The address field of a directory record with this classification may not be altered without the customer's prior consent. This option may be combined with 4.1 (a), (b), (c) or (d), and options 4.1 (f) and (g). | 6) Options (e), (f) and (g) meet the requirements of the Data Protection in Telecommunications Directive. It is important that a flag is attached to records with the partial address option otherwise there is the possibility that the address field may have details added by data users downstream. |
| (f) "No reference to gender option" - a directory status classification signifying that the customer has chosen not to have his or her gender shown. A directory record with this classification may not have information added which denotes the customer's gender without the customer's prior consent. This option may be combined with 4.1 (a), (b), (c) or (d) and options (e) and (g). | |
| (g) "No direct marketing option" - a directory status classification denoting that the customer has indicated that their directory record may not be used for direct marketing. | 7) If a customer has given his/her specific consent to a particular company to offer goods and services over the telephone/by mail this will override the general rule not to use directory information to make direct marketing calls/send direct mail to that individual. Even where a customer has an existing relationship with a company, that company should respect that customer's wishes if they have chosen the "no direct marketing" option. The only exception to this would be if the customer has positively indicated to that company a willingness to receive direct marketing calls/mail. |
| 4.2 With effect from [date to be agreed], each PTO/Other
Licensee will offer business customers the directory status classifications
at 4.1 (a), (b), (c) and (d) together with the following option:-
(a) "Do not recontact for classified directories" - a directory status classification denoting that the customer has indicated that their directory record should not be used to recontact them for the purpose of selling an entry in a classified directory. |
|
| 5. PERMITTED USES
5.1 This section sets out permitted uses of directory information. Directory information may only be used for the purposes set out in this section unless the customer to whom the directory record relates has given his / her consent to other uses in accordance with the process outlined in Section 6. |
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| 5.2 Directory information may be used for compiling and publishing printed telephone directories which: | |
(a) contain no directory records which have the following
directory status classifications:-
|
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| (b) Are ordered alphabetically by name. | 8) Ordering by name accords with customers' expectations in that when using a phone book knowledge of a customer's surname and partial address (depending on the distinctiveness of their name) is required in order to locate a telephone number. Ordering by address would allow searching on the basis of an address only which may raise privacy concerns. |
| (c) Contain at least the customer's name, full or partial address and telecommunications numbers for business or residential customers or both within a geographical area. | |
| (d) Have no fewer than one thousand records or cover no less than one square mile per directory whichever is the smaller. | 9) The purpose of this rule is to prevent the publication of small directories listing single or selected streets which would permit searches by address only without name. Street by street directories might facilitate marketing calls by making it easier to systematically target a localised area. The minimum size limit is based on BT's contract for business directory data. |
| 5.3 Directory information may be used for the purposes of compiling and publishing directories which can be accessed electronically. Directories which can be accessed electronically include directories in machine readable media (eg CD-ROMs, floppy disks) and on-line access to a directory database (eg on-line service, Internet access). Such directories must meet the following rules: | |
(a) No records with the following directory status classifications
may be used:-
|
10) Ex-directory records are excluded as they could be used, through a process of elimination, to confirm the address of ex-directory customers. |
| (b) They must only allow searching to provide information based on the enquirer supplying the name and approximate address of the party being sought. | 11) This rule is to prevent searching by address or name only which may raise privacy concerns for residential customers. Comments are invited on whether searches by name only (ie no address) would be acceptable for business customers. |
| (c) The number of matching records generated from a single search may be no greater than 500. | 12) This rule is to prevent bulk downloading of the database. Unless there is a restriction all directory records could be downloaded very quickly. Five hundred is the current restriction in BT's copyright contract for business directory information. The restriction needs to allow for the full entry to be displayed for businesses with multiple records eg local authorities. |
| (d) The results of the search must be sorted alphabetically by name. | 13) This rule is to prevent street by street listings for reasons outlined above. |
| (e) Directories in machine readable media must be encrypted to prevent searching other than in accordance with the rules at 5.3 (b) to (d) above and to prevent directory records being downloaded in bulk. | |
| (f) Directories in machine readable media must not enable the user of a machine interface to change or interfere with directory records, or download them in bulk. | 14) The purpose of this rule is to prevent the bulk downloading of directory records. A machine interface would make bulk downloading of the entire database easier and quicker as no manual intervention would be required. |
| (g) Directory records may only be copied and pasted one at a time. | 15) The purpose of this rule is to prevent the bulk downloading of the entire database. Comments are invited as to whether this restriction should be limited to only one record at a time. |
| 5.4 Directory information may be used for the purposes of providing voice directory enquiry services including operated assisted and automated voice services. Such services must meet the following rules:- | 16) Automated voice services have been classified with voice directory enquiry services as essentially they offer the same type of service. They have not been classified with directories accessed electronically as such directories involve the user directly interfacing with the database and are therefore the subject of more stringent rules whereas directory enquiry services do not involve customers directly interacting with the database. |
| (a) Permit searching only on the basis of the enquirer providing a name and approximate address. | 17) See explanatory note (11) |
| (b) The number of matching records generated from a single search is no greater than 500. | 18) See explanatory note (12) |
| (c) Ex-directory records are only used to confirm that a customer is ex-directory. | (19) This depends on the treatment of ex-directory records - see options A and B in Chapter 4. |
| (d) "Directory enquiry services with call completion" listings are only used when a call completion service is offered which directly connects the enquirer to the number required without disclosure of the number and gives the called party the option of accepting the call or not. When such services are not offered, records with this classification must be treated as ex-directory records in accordance with paragraph 5.4(c). | |
| 5.5 Directory information may be used to provide batch directory enquiry services which are used for the bulk addition of telecommunications numbers to existing lists of names and addresses. Such services must meet the following rules:- | |
| (a) A company may only add telecommunications numbers to a customer name and address list if it has a prior relationship with the customers on that list. | |
| (b) Telecommunications numbers may not be added to the Electoral Roll or derivatives of it. | 20) Adding numbers to the Electoral Roll would lead to the creation of a new directory product organised street by street which is prevented by other rules (see explanatory note (9) for the reasons for preventing this). |
| (c) If directory records have a flag indicating "no direct marketing", this flag must be added to client lists, and all records with such a flag must not be used for direct marketing unless the customer has given consent to the particular company for direct marketing. | 21) See explanatory note (7). |
(d) No records with the following directory status classifications
may be used:
|
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| 5.6 Directory information may be used to create a database for any of the purposes outlined at paragraphs 5.2 to 5.5 above. Such databases must meet the following rules:- | |
| (a) Address fields may be altered by correcting details and/or the addition of postcodes. Address fields for directory records with the "partial address" option may not be altered without the customer's consent. | |
| (b) The addition of other data to directory records requires the prior consent of the customer to whom the directory record relates. Obtaining consent is subject to the rules set out in Section 6 below. | |
| 6.
OTHER USES AND PROCESS FOR OBTAINING CUSTOMER CONSENT
6.1 Uses of directory information not outlined in Section 5 and/or the addition of data to directory records other than that permitted at paragraph 5.6 (a) requires the prior informed consent of the customer. A positive indication of consent (ie on an opt in basis) must be obtained. |
22) This opt in requirement accords with data protection legislation. |
| 6.2 Business directory records may be used to recontact business customers to obtain their consent to uses of their directory record other than those permitted in Section 5, and/or to obtain their consent to the addition of other data to their directory record. Recontacting business customers for this purpose is subject to the following rules: | 23) This covers the creation of classified business databases. |
(a) No records with the following directory status classifications
may be used:
|
|
| (b) Business records with the directory status classification "Do not recontact for classified directories" may not be used to recontact customers in connection with an entry in a classified business directory. | |
| 6.3 Residential records may not be used to recontact residential customers to obtain their consent for their directory record to be used for purposes other than those permitted in Section 5 unless: | 24) See Chapter 4, paragraphs 4.14 - 4.15. |
| (a) the customer initiates contact with the company holding the directory information and that company seeks consent to other uses at that time; or | |
| (b) the company holding directory information has a prior relationship with the customer. | |
| 6.4 Use of residential records in accordance with paragraph 6.3 is subject to the following rules: | |
(a) No records with the following directory status classifications
may be used:-
|
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| 6.5 The Code places no restrictions on the use of any database generated as a result of recontacting customers in accordance with paragraphs 6.2 and 6.3 above. | |
| 7.
SUB-LICENSING OF DIRECTORY INFORMATION
7.1 Data users may not sub-licence or resell directory information except if a new product or service has been created for the purposes outlined in Section 5 or Section 6. This does not apply to the obligation on PTOs/Other Licensees to supply directory information about their customers on request. |
25) The purpose of this rule is to prevent reselling of raw directory information by third party recipients, unless a new product or service has been created for the purposes outlined in Section 5 or Section 6. Reselling of raw directory information in this way would weaken the control that PTOs/Other Licensees have over the use to which directory information is put as PTOs/Other Licensees would not have a direct contract with the recipient of directory information. |
| 7.2 For the avoidance of doubt, this rule does not prevent the sub-licensing of databases which are created in accordance with paragraph 5.6. |
D.1 This Annex sets out Oftel's view of the definition of the relevant economic markets in the provision of directory information and identifies the barriers to entry to each market. These barriers to entry and Oftel's suggested remedies are discussed in Chapters 6 and 7. Each level of the vertical chain for the four functions identified in Chapter 6 (Figure 6.1) is analysed in turn.
D.2 Market definition is derived from a consideration of demand side and supply side substitution possibilities. Demand side substitutability exists where the current purchasers of the product in question could and would switch to an adequate substitute if the price of the product were to go up. Competing goods or services will only be in the same market as the product in question if they are sufficiently close substitutes that they competitively constrain the price that can be charged for the product. Supply side substitutability exists where the suppliers of other goods or services would rapidly, and at little or no additional cost, start to supply the product in question if its price were to rise. Supply side substitution is a particular type of market entry; hence it leads naturally into a consideration of entry possibilities and barriers to entry.
COLLECTION AND COMPILATION OF RAW DIRECTORY INFORMATION
Market definition
D.3 It seems likely that each PTO's raw directory information constitutes a separate market, ie each operator is a monopolist in its own customers' directory information. Demand side substitutability is limited: one PTO's directory information may not be a close substitute for another PTO's directory information (except where a customer uses two suppliers). This view is strengthened when it is taken into account that PTOs have licence requirements to supply their customers with comprehensive directory enquiry services. In providing such a service PTOs' raw directory information sets are not substitutes, but complements. There appear also to be few supply side substitution possibilities. If (say) BT were to increase the price of supplying compiled information on its customers, it is not likely that anyone else could enter rapidly and relatively costlessly enter into collection and compilation of directory information on BT's customers.
D.4 It is conceivable that there could be independent service providers undertaking the collection and compilation of directory information or that there could be alternative information sources. But these alternatives might not easily be able to collect all the categories of information on each customer that would be required (see paragraph 6.16). It might be difficult to create a comprehensive database if the PTOs were by-passed. Also, there could be problems in ensuring the accuracy and reliability of the information. At best, they are likely to provide only partial substitutes to obtaining the information from PTOs and it remains to be seen whether they would be cost effective.
D.5 Oftel's analysis suggests that all PTOs have the potential for market power in the supply of directory information. But this is not to say that all PTOs necessarily possess market power. The PTO's position could be counteracted by the existence of buyer power, or it may be that in practice the directory information held by relatively small PTOs is not sufficiently valuable for the PTO to be able to set an excessive price.
Barriers to entry
D.6 As discussed above, competitive entry into the collection of directory information other than by PTOs is conceivable but unlikely to provide close substitutes. The PTO has a direct relationship with its customers and will collect most of its directory information when the customer starts to take service from it. Furthermore, most of the directory information will be required by the PTO in any case for billing and customer relations purposes, so the PTO benefits from an economy of scope (ie it is cheaper to collect directory information if the same organisation is also billing the customer). This implies that it would more expensive for another organisation to recontact a PTO's customers - it would also be unwelcome to many customers, who might refuse to provide the required information.
CORE DATABASES
Market definition
D.7 On the demand side, core databases are only likely to be substitutes if they include directory information on an overlapping set of customers. If not, core databases will tend to be complements (eg if there were separate databases holding fixed and mobile numbers). If all or most core databases were more or less comprehensive, it would be appropriate to define a single market.
D.8 Even if core databases were not overlapping, there would be a single market for core databases if supply side substitutability existed, ie if a provider of (say) a mobile number database could easily switch into the construction of a fixed number database, if the price of downloads from fixed number databases were to increase. In principle, this depends upon the arrangements for obtaining directory information from PTOs. Since Oftel proposes licence conditions to allow the purchase of directory information on fair, cost orientated and non-discriminatory terms, then it seems appropriate to define a single market in core databases.
Barriers to entry
D.9 It is useful to consider why there is currently only one core database. Under current arrangements, independent service providers face a substantial barrier to entry, namely the refusal by BT to make available directory information on residential customers. Oftel's proposals will address this barrier. But PTOs do not face the same problem, because current licence obligations require PTOs to supply directory information to interconnecting PTOs on reasonable terms.
D.10 The lack of entry into core databases is likely to be explained by the difficulties of obtaining access to downstream revenues, because of the barriers to entry to the markets for directory services and products (such as DQ calls and phone books). These downstream entry barriers would have made it difficult for a new core database to earn an adequate return on its investment.
PRODUCT DATABASES
Market definition
D.11 There will tend to be demand side substitutability between product databases designed for the same downstream service or product (eg DQ calls), unless there are difficulties in switching between providers (eg expensive technical interfaces that are specific to particular databases). The skills required to construct different types of product database may be similar, which suggests supply side substitutability may also exist. As a working definition, Oftel has treated product databases as constituting a single market.
D.12 It may be that the providers of product databases will also turn out to be the providers of core databases, or indeed that a single physical database might perform both functions. Nevertheless there is a conceptual distinction between the construction of a core database by aggregating directory information from a number of different PTOs, and the creation of databases (including 'search engines') appropriate for particular downstream services and products. These two functions could be performed by different organisations. The competitive process should determine whether this or provision by the same organisation is more efficient.
Barriers to entry
D.13 The difficulties faced by a potential entrant into product databases are the problems in obtaining access to both upstream and downstream markets. A potential entrant into product databases needs to be able to construct its own core database, by obtaining directory information from PTOs, or have access or downloads of a core database run by another organisation. To be able to obtain a return on investment, the entrant would also need fair access to downstream markets.
SUPPLY OF DIRECTORY SERVICES AND PRODUCTS
Market definition
D.14 To some extent all of the downstream directory services and products are demand side substitutes (eg a phone book or a CD-ROM can be used instead of a DQ call). However, it is unlikely that they are sufficiently close substitutes to justify defining a single market in directory services and products. For example, phone books cover only the local area; for a CD-ROM to be cost effective a customer would probably need directory information frequently; neither phone books nor CD-ROMs are as up-to-date as on-line or DQ services.
D.15 The methods of production of the various directory services and products may be sufficiently different to make supply side substitutability relatively unlikely. For example, to provide a DQ call service requires expertise in running a call centre, different skills from those needed to produce and distribute phone books.
D.16 Oftel has used the following working definitions of the downstream markets:-
DQ service
D.18 The barriers to entry in the provision of DQ services are set out in Chapter 7 (paragraphs 7.2-7.26). They relate to access to product databases, the possibility of cross-subsidy of existing DQ services run by PTOs, the costs of billing, and use of short access codes.
Phone books
D.19 The barriers to entry faced by potential entrants into the supply of phone books are discussed in Chapter 7 (paragraphs 7.27-7.36). They concern access to directory information and/or core databases, the bundling of the phone book with the exchange line rental, economies of scale, and branding.
Classified business directories
D.20 In the course of 1995, the Monopolies and Mergers Commission (MMC) carried out an investigation into the market for advertising in classified directories, with a particular focus on BT Yellow Pages. The MMC report identified a number of different barriers to entry. First, BT's trademarks of Yellow Pages and the Walking Fingers logo yield important brand image advantages to BT. Second, there are economies of scale in print runs: average printing costs decline significantly as the print run increase up to 100,000 and decline a little more up to 2,000,000, at which point scale economies appear to be exhausted. Third, a type of 'network externality' exists, ie the more that consumers use a directory the more attractive it is to advertisers, and the greater the range and volume of advertisers that a directory has, the more likely is to be used by consumers. This makes investment in new directories quite risky and losses in the early years are likely to be incurred as consumer usage and volume of advertisers is built up. Fourth, even though the product is local, there may be an advantage in being able to advertise nationally, and so entry into just one local area may be difficult. Fifth, although Yellow Pages is largely operated at arm's length from the rest of BT, the association with BT appeared to yield some benefits (eg easier access to information on BT's customers, references to Yellow Pages but not competitors in BT's advertising and marketing literature).
D.21 The MMC considered that the major advantage accruing to Yellow Pages was that it was first in the market and was able to benefit from scale economies and overcome the network externalities when it faced limited competition. Since the market is now mature, new entry on a sizeable scale is unlikely (and BT accepts this view).
CD-ROMs and On-line services
D.22 The barriers to entry are discussed in Chapter 7 (paragraphs 7.38-7.41). They arise from the difficulties in obtaining access to directory information and/or core databases, and the costs of billing.
E.1 Oftel's approach to the various issues associated with the charging for directory information to PTOs and independent service providers by PTOs was summarised in Chapter 6. Most are discussed in greater detail in this Annex. Two further issues - the structure of charges (fixed charge versus per look-up) and the extent to which costs might be recovered from customers with directory entries - are addressed in Annex F.
E.2 It will be for each PTO to set the charges for its directory information for sale to other PTOs or to independent service providers. Oftel only has a role to resolve disputes and to prevent anti-competitive behaviour. However, as discussed in Annex D, Oftel's initial view is that each PTO is likely to be in a separate market for sales of raw directory information and so potentially has market power that could be abused. If Oftel received a complaint about the rates charged by a particular PTO, it would first form a view as to whether, in practice, that PTO had market power. Generally Oftel would not proceed with the investigation unless the existence of market power had been established.
E.3 The following issues are discussed below:-
E.4 The level of charges should be reasonably derived from the costs of collection. That is, the revenues that the PTO receives from sales of raw directory information (including, where relevant, sales to the downstream arm of the organisation) should not systematically exceed the appropriate measure of relevant costs.
E.5 The term 'systematically' is used because revenues might not match costs in any given year. The total collection costs are likely to be almost entirely fixed with respect to the number of 'units' sold, so the average cost per unit may not be known with any precision until the end of the year. But charges would normally be set at the start of the year, perhaps based on a prediction of the number of units sold. In such circumstances, it might not be possible to guarantee charges equal to costs in any year. The nature of the units sold - charge per buyer or per downstream look-up - is discussed further in Annex F.
Excessive charges
E.6 If there were a dispute about whether or not the charges set by a PTO were excessive, Oftel might be called upon to adjudicate. If so, what is the appropriate cost base against which Oftel should judge whether or not a charge is excessive? The main options are:-
stand-alone cost of collection (SAC)
long run incremental cost plus equal mark-up or, as a proxy, fully allocated cost of collection (FAC)
Each of these cost measures would include an appropriate return on capital employed as well as operating costs. In all cases the cost base should be measured net of the revenues received by the PTO from customers with directory entries - this issue is discussed in Annex F.
E.7 The SAC is the cost of collection if the PTO were carrying out no activities other than directory information collection. The SAC would be the natural starting point to judge whether or not a charge were excessive, because a charge above the SAC could not be maintained in a competitive market since it would be undercut by competitors. The SAC of collection will be high (and the incremental cost correspondingly low), if there are substantial economies of scope with other activities, eg if information collection is much cheaper because the PTO needs information anyway to bill its customers for telecommunications services. Economies of scope give rise to common costs (eg between collection and billing).
E.8 The problem with using SAC as the maximum allowable charge for selling directory information would be that it might allow double recovery of (part or all of) the common costs. In theory the way to avoid this would be to ensure that the PTO does not recover more than the SAC of collection and billing taken together from the revenue streams for sales of directory information and billing - this is the so-called 'combinatorial' test. Since billing costs are not charged for separately, but recovered through general retail prices, this could be very difficult to verify.
E.9 One way around this problem would be to use the equal proportionate mark-up rule (as has been applied to set BT's interconnection charges in the network charge controls from 1 October 1997 - see Network Charges from 1997, Statement, July 1997). Under this approach the maximum charge would be defined as the incremental cost of collection plus an equal mark-up. To calculate this, one would need to know the incremental cost of collection, the incremental cost of all activities that give rise to an economy of scope with collection, and the size of the common costs. It is likely to be difficult to obtain all of this information. The fully allocated cost of collection might be a pragmatic way to cut through this problem and is likely to be similar to the incremental cost plus equal mark-up (although it might be necessary to verify the cost allocation methods used by the PTO).
Low or negative charges
E.10 For small PTOs with relatively few customers there is a possibility that charges will be too low, ie insufficient to cover their costs of information gathering and compilation. An extreme example of this is the current situation in which other licensed operators are forced to 'sell' their directory information at a negative price, ie they have to pay BT for their information to be held on OSIS. The result of this arrangement is that BT has an unfair advantage over other licensed operators, because it can recover its collection costs from downstream directory information products, whereas other licensed operators not only have to absorb their costs of collection but also pay to be included in the dominant core database, OSIS. OLOs can only recover these costs through charges for telephony services, which puts them at a disadvantage when competing against BT for customers.
E.11 Given the existing terms of Condition 13 of BT's licence, the charges paid by OLOs to BT for their customers' directory information to be held on OSIS have been determined in recent years by Oftel (as a Standard Service). But the source of BT's ability to charge OLOs (and to avoid paying them) for putting their customers' directory information on OSIS may be two reinforcing factors: the relatively low value of the information because it relates to relatively few customers, and the fact that OSIS is a monopsonist (the sole buyer). Competition between database providers should in time remove the dominance of OSIS.
E.12 But whilst OSIS remains the dominant core database there may be a need for Oftel intervention to ensure that PTOs are not exploited by being forced to sell their raw directory information at excessively low or even negative prices. Since PTOs will have obligations to make available information, they should receive adequate compensation. It might seem reasonable, therefore, that PTOs should recover at least their incremental costs of collection (so long as the PTO does not have a very inefficient level of collection costs). So long as the PTO receives revenue at least as large as the incremental cost, its profitability is improved by collecting and selling directory information.
NON-DISCRIMINATION
E.13 Since raw directory information may be purchased from the PTO by a number of different buyers, who may be competing against each other in downstream markets, it is critical that the charges set by sellers with market power be non-discriminatory. That is, to avoid the distortion of competition in downstream markets, buyers should generally be able to purchase the same directory information at the same price. This applies regardless of whether the purchasers are other PTOs or independent service providers.
E.14 It might be legitimate for charges to vary depending upon the method of delivery, eg paper, electronic download, on-line access. But for PTOs with market power in directory information, Oftel would expect such differences in charges to be justified by differences in the cost of supply. Charges might also vary if different information sets are being purchased, eg daily updates versus monthly updates, although again the differences in charges should be derived from the differences in cost.
E.15 Two buyers purchasing the same information sets through the same method of delivery should generally pay the same charge (but see the discussion of end-use charging in the next section). To promote non-discrimination in charges, Oftel proposes that all PTOs should publish a list of their charges for directory information.
End-use charging
E.16 In theory, differential charging by end-use could promote economic efficiency. The costs of collecting directory information are almost entirely fixed, ie do not vary with the number of buyers or downstream units sold. In general, the most economically efficient way to recover fixed costs is by reference to the demand elasticities of the end-uses (the greater the elasticity, the lower the appropriate mark-up). So if the demand for (say) the DQ service is more sensitive to price than (say) the demand for CD-ROMs, sales of directory information for use in the DQ service by independent service providers and OLOs should in theory be at a lower charge than sales for use in CD-ROMs. Otherwise, there may be a distortion of consumption: usage of the DQ service could be too low (because the charge might be too high) and usage of CD-ROMs could be too high.
E.17 There would be another argument in favour of charges to PTOs and independent service providers differing by end-use if the costs of collecting raw directory information were to vary to some extent by end-use. It may be that some of the collection costs are directly attributable to particular downstream products, eg the identification of layouts and typefaces specific to phone books. In such cases these costs should in principle be recovered only from the particular downstream uses to which they are causally related. However, Oftel recognises that there may be practical difficulties in disaggregating collection costs to this extent.
E.18 The implementation of end-use charging could give rise to potential for sellers with market power in directory information to distort competition, especially if the sellers were also vertically integrated, ie providers of some downstream services and products. For example, the seller could set relatively high charges for the end-uses that were the closest substitutes for its downstream products. End-use charging might also be used to have similar effects to end-use restrictions which could distort the operation of directory information markets.
E.19 The European Union Voice Telephony Directive (VTD) and its proposed successor, the Amending Voice Telephony Directive (AVTD), both place significant restrictions on the ability to set end-use charges. Article 12(3) of the VTD rules out end-use charges for the services covered by the Directive since it requires that "Tariffs for access to and use of the fixed public telephone network shall be independent of the type of application which the users implement, except to the extent that they require different services or facilities." It is anticipated that the VTD will be superseded by the AVTD by 1 January 1998. The common position text of the AVTD in Article 17(3) contains a similar provision to the VTD, but it also allows for the ban on end-use charges to be lifted (Article 17(6)) : "...a Member State may authorise its national regulatory authority not to apply paragraphs 1, 2, 3, 4 or 5 in a specific geographical area where it is satisfied that there is effective competition in the fixed public telephone services market."
E.20 End-use charging could promote economic efficiency or have anti-competitive effects depending upon the particular circumstances. Any proposal for charges to vary by end-use would need to be consistent with European Union Directives. If this hurdle were cleared, but a complaint were made, Oftel proposes to investigate end-use charging on a case by case basis. In this context, for Oftel to take action against a charge varying by end-use, it would generally need to establish that the seller of directory information had market power and were abusing that market power by restricting, distorting or eliminating competition in a particular downstream market (or markets).
Vertical integration
E.21 Particular concerns about the potential for discriminatory behaviour to distort competition arise where there are vertically integrated players with market power at one or more vertical level. To ensure effective competition such players should charge internally for directory information (and core and product databases) to their downstream arms on the same basis as they charge externally to other buyers for each individual element of the service.
E.22 Currently BT is a vertically integrated player with market power in directory information markets. Where it faces direct downstream competition, eg Yellow Pages and Thomson in the business directories market, it does charge the same to its downstream arm as to its competitor. In future when BT will face much greater downstream competition across a range of markets, including core and product databases as well as downstream products, it will be vital for the effective functioning of competition that BT does not discriminate against downstream competitors.
Accounting Requirements
E.23 The accounting requirements on BT will be important to check against discriminatory behaviour arising from vertical integration. These will need to be capable of identifying the transfer charges between different BT services for two reasons: to check that BT is charging itself internally on the same basis that it charges externally, and to confirm that the downstream prices to end-users are sufficiently high to cover costs - otherwise implicitly BT would be charging itself less than it was charging others.
E.24 Accounting information may also be needed to assess the validity of the level of charges that BT might set for directory information, OSIS, DAS/Pathfinder, and downstream services and products, if complaints are made to Oftel. In principle, there could be complaints that any of BT's charges are too high or too low.
E.25 In Chapters 6 and 7 (see Figure 6.4), Oftel proposes the following split of BT's activities between the Systems Business (SB) and Supplemental Services Business (SSB):-
Non-discrimination
E.26 In order to demonstrate that BT was not discriminating against downstream competitors, the calculation of the following transfer charges between different parts of BT's businesses would need to be documented, understood and audited, in addition to the transfer charges for basic network services, such as conveyance:-
Cost information
E.28 If Oftel were called upon to investigate the reasonableness of charges set by BT, including whether charges were anti-competitive or unfair, it would need to have cost information from BT to inform its assessment. BT should therefore be in a position to supply on request within two weeks cost information, capable of being audited, for each of the services and products listed:-
E.30 Initially it is expected that the cost information supplied will be on a fully allocated cost basis. In due course, Oftel would expect BT to produce information on an incremental cost basis.
F.1 This Annex addresses two issues concerning the methods of charging to recover various directory information costs, in particular:-
whether the rates charged by data collectors (PTOs and other licensees) and core and product database providers should be in the form of a fixed payment or a per look-up (or per 'hit') payment; and
whether customers should pay for their directory information to be put onto databases, rather than all of the costs of collection, core and product databases being recovered from users of downstream directory products.
F.2 To inform the assessment of these issues, the way in which costs arise in directory markets is discussed in the next section. Thereafter, some general principles are set out that form an analytical framework to address the issues. These principles are then applied to each of the two issues identified above.
COST DRIVERS
F.3 Oftel's understanding of the way in which directory costs arise is set out in this section. This is important background against which to consider the economic implications of different charging methods. The analysis is broken down into the four vertical levels identified in Chapter 6: the collection of raw directory information by PTOs from their customers; the aggregation of PTOs' directory information into a core database; the creation of product databases, tailored to particular services and products; and the provision of downstream directory services and products, such as DQ calls, phone books, and classified business directories.
Collection costs
F.4 The information in 'simple' directory entries is collected at the time that the customer makes the order for service with the PTO. They require no customer recontact and are usually straightforward one line entries. Most of the information (eg name and address) is required anyway for billing purposes etc. Therefore, one would expect the incremental costs of simple directory entries to be relatively low.
F.5 'Complex' entries are more costly than simple entries, because they involve recontacting customers to check details, or multi-line entries (eg the customers' numbers need to be ordered with different headings, such as sales, accounts etc). Another type of complex entry is where the customer takes service from more than one operator and so co-ordination between operators is required. Most residential entries are simple, but about one-half of business entries are complex. Consequently, the collection costs of business entries are generally substantially larger than residential entries.
F.6 Other types of collection cost relate to the checking and correction of entries, deletions and amendments to entries. Some of the collection costs may be associated with particular downstream products, eg some information may only be needed for phone books such as the structure or typeface for the phone book entry.
Core database costs
F.7 A core database is created from a number of sets of directory information. This involves formatting, cleansing (checking for typos etc), aggregation into a single database, and maintaining database integrity. These costs depend partly upon the number of pieces of information to be formatted and cleansed and partly upon the number of different sets of information from different sources to be aggregated. Cleansing costs will be greater, the lower the quality and reliability of the source information. Computer hardware and software costs will be important elements of the costs of core databases. These costs are unlikely to vary to a significant degree with the number of buyers of core database downloads. In addition, there are the costs of purchasing the directory information from PTOs.
Product database costs
F.8 Apart from the costs of obtaining the directory information (from PTOs or from a core database), the costs of product databases are likely to be mostly computer hardware and software costs. Consequently, they are likely to a significant extent to be fixed, ie not increase without the amount of usage of the database. However, there may be capacity costs associated with the level of demand for look-ups in the busy hour (defined as the period of greatest demand in the day/week/month/year, as appropriate).
Downstream service and product costs
F.9 The two highest revenue downstream services and products for Oftel to consider (excluding classified business directories, which has been addressed by the MMC and the OFT) are DQ services and phone books.
DQ service
F.10 The provision of a DQ service requires the operation of a DQ call centre, staffed by operators who can access a suitable directory assistance product database. The main cost driver is likely to be the number of call minutes (the product of number of calls and operator time per call) - more call minutes require more operators (and/or more call centres). But the distribution of call minutes by time of day may matter as well as the total number, since the number of operators required may depend upon the number of DQ calls in the busy hour. There are likely to be some economies of scale: statistically, a greater volume of calls implies on average greater predictability of the arrival of calls in the busy hour. In addition, there is the cost of conveyance over the network to reach the DQ call centre. Conveyance costs vary with the number of call minutes (and the time of day profile of call minutes).
Phone books
F.11 The production of phone books incurs costs of materials (eg paper and ink), printing, storage and distribution. Costs vary with the number of phone books produced. There are some economies of scale in printing (ie average cost declines with size of print run). There are also likely to be economies of scale in distribution costs.
Oftel's PRINCIPLES OF CHARGING AND COST RECOVERY
F.12 In general, when developing an appropriate policy for issues of charging and cost recovery, Oftel takes into account a number of principles. These principles were used, for example, in developing Oftel's policy towards the appropriate interconnection charges for geographic number portability (and used also by the MMC in its analysis of this issue). In different situations some principles are more important than others. In this section the six principles are outlined.
(1) Cost causation
F.13 It can be argued that costs should be borne by those whose actions cause the costs to be incurred at the margin, so that efficient pricing signals reflecting resource costs would be sent to buyers. If prices are above (below) resource costs, buyers may be encouraged to purchase too little (too much) of the product. This conclusion may be modified if there are externalities.
(2) Distribution of benefits and externalities
F.14 The charging mechanism should take into account the beneficiaries of the service that is being provided. This is not solely an equity principle, since allocative efficiency requires that price signals take account of 'externalities' (either external benefits or external costs). Externalities arise where the actions of an individual yield benefits or impose costs on others, but that individual has no (direct) incentive to take such effects into account. In such circumstances, prices that were set equal to the supplier's incurred costs (following the cost causation principle) would not provide efficient pricing signals: eg if there were external benefits, efficient prices should be below incurred costs (to correct for the externality).
(3) Cost minimisation
F.15 Those who have the ability to affect the size of costs should face strong incentives to minimise costs. Cost minimisation (or productive efficiency) involves operational efficiency and the rapid adoption of cost reducing technology.
(4) Effective competition
F.16 It is important that the pressures for effective competition are not weakened or undermined by, for example, allowing one operator to raise unduly the costs of a competitor. If the incumbent were able to raise its rivals' costs, the effectiveness of competition from such operators would be reduced. Effective competition would also be enhanced by charges that encouraged efficient entry and discouraged entry by inefficient operators.
(5) Reciprocity and symmetry
F.17 Where equivalent services are supplied on a reciprocal basis, it may be appropriate that charges are symmetric in each direction. This might coincide with other principles because, in general, it can encourage efficient provision, avoid distortions of competition and be simple to implement.
(6) Practicability
F.18 A final, but important, consideration is that the mechanism for setting charges should be practicable and implementable. As well as raising administrative costs, complex mechanisms can inadvertently create perverse or inefficient incentives.
STRUCTURE OF CHARGES
F.19 For the recovery of collection costs from database providers, sales of core databases and product databases, what should be the structure of charging? The main options are a fixed payment per buyer or a variable charge per downstream look-up. Variants are also possible, such as a charge per 'hit' (number successfully obtained) rather than per look-up, or a charging structure that involved both a fixed and variable element. The principles of cost causation, distribution of benefits, effective competition and practicability are used to assess the pros and cons of these different charging structures.
Cost causation
F.20 The costs of collection are not likely to vary significantly with the number of purchasers of downloads, nor will they vary with the number of times that the collected information is looked-up when aggregated into a database. Therefore, from a cost causation point of view there is no preference for either charging approach. Similarly, the costs of core and product databases are not driven to a significant degree either by the number of buyers or the number of look-ups (or the number of terminals, which is the current charging structure used by BT for its directory assistance database, DAS).
F.21 The marginal cost per downstream look-up or per buyer is likely to be approximately zero, so the charging question essentially concerns the recovery of a fixed cost. The theoretical ideal would be to set price equal to marginal cost (to maximise usage of the information), but this is not feasible because it would result in the PTO incurring a loss. Compared to this ideal, each of the charging options is likely to introduce a different type of distortion. A fixed payment per buyer might prevent the establishment of relatively low volume downstream markets, because the buyer would face a relatively high average cost of information for each downstream unit sold. On the other hand, a fixed payment provides an incentive for purchasers to maximise the use of the directory information once purchased. A per look-up charge might prevent relatively low value downstream markets from being sold, because there would have to be a payment to upstream suppliers for each downstream unit sold. But a per look-up charge ensures the same average cost between buyers (discussed below under 'effective competition').
F.22 A further point is that the charging structure affects the sharing of risk between buyer and seller (which is an issue relating to allocative efficiency). With a fixed payment the risk is borne entirely by the buyer, because its payments to the seller are fixed but its revenue depends upon the number of downstream units that are sold. (The seller's risk concerns only the number of buyers). Charging per look-up may be more equitable and economically efficient, because it results in a sharing of the risk - the revenue of both buyer and seller depends on the number of downstream units sold.
Distribution of benefits
F.23 In the absence of implications of the cost causation principle for the structure of charging, it seems appropriate for the pattern of charging to follow the pattern of benefits. Benefits are obtained by downstream customers on the basis of number of look-ups, or perhaps even more accurately on the basis of 'hits'. A fixed payment is likely to reflect poorly the distribution of benefits. The distribution of benefits principle, therefore, favours per look-up or per hit charging.
F.24 A charge per hit has other advantages. It would encourage PTOs and other licensees to provide higher quality (ie more reliable) data, because payment would only be received when a hit was made. Furthermore, if a hit is defined to exclude discovering that customer is ex-directory, it would provide an incentive for the PTO or other licensee to minimise ex-directory customers and maximise the size and value of the database.
Effective competition
F.25 It has been suggested by some commentators that access to the information collected by PTOs and other licensees and access to core and value added databases should, for competition reasons, be on a per look-up basis, rather than a fixed fee. Currently, BT's charges for DAS (determined by Oftel) depend on the number of terminals used, not the number of look-ups. Per terminal charging is used by BT partly because it is currently unable to record the number of look-ups. No charge has been determined by Oftel for a download of OSIS, and it has now been deleted from the list of interconnection Standard Services.
F.26 The principle of per look-up charging is, however, present in current arrangements, because BT uses the number of look-ups as one of the mechanisms to determine the allocation of OSIS costs to BT's downstream products. BT also allows other licensed operators an abatement to the charge for holding entries on OSIS if they are sold on to Yellow Pages and Thomson.
F.27 As suggested above, fixed payments might result in a distortion of competition in downstream markets. This issue will be especially important in the transitional period when BT has a substantial inherited advantage over competitors in downstream markets. By being able to spread the fixed payments over a larger number of downstream units sold, it will have an advantage over its competitors. In the case of DAS (and its replacement, Pathfinder), per terminal charging and the absence of usage dependent prices provides a strong incentive for DQ providers not to use any other product database. While DAS remains dominant, the DQ provider is likely to need to use DAS for some enquiries, but since no DAS costs are saved by using alternative databases for a proportion of enquiries, the DQ provider's costs would be increased by using competitors to DAS. This creates a significant barrier to competition in the product database market.
Practicability
F.28 Since charges should be cost oriented, use of a fixed payment will not be easy to implement if the number of buyers cannot be forecast with accuracy. The total number of downstream look-ups may be more predictable - if so, in this respect a per look-up or a per hit charge would be easier to implement.
F.29 The practical difficulty with charging on a per look-up basis is that the number of look-ups needs to be recorded. This should be possible for on-line and DQ services (although DAS is currently incapable of doing it), but it will not be so easy to measure for phone books, CD-ROMs etc. However, market research or surveys of average usage per phone book and per CD could be carried out and this could be used to derive the variable charge per book or CD sold, consistent with the charge per look-up for other end-uses. Market research of this sort is already carried out by BT.
Conclusions
F.30 In the absence of clear-cut implications from the principle of cost causation, application of the principles of distribution of benefits and effective competition suggests that it would generally be preferable for charges for raw directory information, core and product databases to be in the form of a per look-up or per hit payment rather than a fixed payment. For PTOs or SPs with market power, it is likely that a fixed payment, without an option to buy on a per look-up or per hit basis, would be regarded as anti-competitive. In some circumstances, efficiency and maximisation of the size of the database might be best achieved by a variant of per look-up charges, namely charges per hit. The reasons for these conclusions are summarised in Table F.1.
Table F.1: Advantages of variable charges over fixed payments
| Principle | Fixed payment | Variable charges (eg per look-up, per hit) |
| Cost causation | Costs of collection, core and product databases do not arise
per buyer
May discourage the development of relatively low volume markets Risk borne solely by buyer |
Costs do not arise per look-up or per hit
May discourage the development of relatively low value downstream markets
Risk shared between data provider and buyer |
| Distribution of benefits | Cost recovery not closely related to benefits | Leads to relatively close relationship between benefits
and cost recovery
Charge per hit would encourage provision of more reliable data and could provide incentives to maximise size of database |
| Effective competition | Favours firms with larger volumes in downstream markets | Scale in downstream markets does not lead to competitive advantage |
| Practicability | Difficulty of forecasting the number of buyers | May be easier to predict the number of downstream look-ups; possible difficulties in measuring the number of look-ups for phone books and CD-ROMs |
F.31 Considered in this section are the pros and cons of the costs of collection, core databases, product databases and downstream products being recovered wholly from purchasers of the downstream products (ie the end-users) as against charging customers for their entries to be collected and maintained on databases and accessed in downstream uses. Oftel does not propose to prescribe what the balance of cost recovery should be - this will be for PTOs to decide. Nevertheless, how PTOs choose to recover their costs from customers with directory entries and end-users could have implications for some of Oftel's objectives, such as providing an improved service to end-users and increasing the value of directory services and products by reducing ex-directory levels.
F.32 The two principles that are most relevant to this issue are cost causation and distribution of benefits. The other principles are not pertinent to this particular charging question.
Cost causation
F.33 Simple entries generally give rise to few costs, so there is no strong argument arising from the cost causation principle that they should be charged for. Since significant costs of collection arise from complex entries, an implication of the cost causation principle is that customers who demand complex entries could be asked to pay for them.
F.34 Unless the costs of core databases vary significantly with the number of entries that need to be held and maintained, the cost causation principle does not provide an argument for core database costs to be recovered from customers. It is not clear how material a cost driver the number of entries is in practice, or how complex the causal relationship might be.
F.35 The costs of product databases and downstream services and products are not closely related to the number of entries (unless this is the structure of charging for directory information, as discussed in the previous section). The costs of product databases are driven primarily by the requirements of information searching; the costs of the DQ call centre and conveyance arise primarily on a per call minute basis; and the costs of phone book materials, printing and distribution vary with the number of phone books produced. Therefore, the cost causation principle implies that such costs should be recovered from end-users.
Distribution of benefits
F.36 Directory services and products are used by those who wish to find a number in order to make a call. The end-user of the directory service or product clearly obtains a benefit. But the recipient of the call that is made after use of the directory service or product (ie the customer with a directory entry) may also benefit. However, this type of externality is a general issue in telecommunications: the decision to call is made by the caller, but a benefit is also obtained by the call recipient. The potential economic problem is that too few calls will be made, because the caller typically incurs all of the costs, but may not take into account the benefit received by the call recipient. The nature of the problem is different for residential and for business call recipients.
Residential directory entries
F.37 For residential customers, in general, the externality is not a problem (ie it is 'internalised'), because people tend to call each other. Therefore, it is not usually thought necessary to alter the cost recovery of calls so that the call recipient pays as well as the caller. Since the issue of the distribution of benefits arising from directory information is essentially the same, this does not on its own provide a strong argument that some directory information costs should be borne by residential customers with directory entries.
F.38 In addition, it would be rash to assume that call recipients always benefit from receiving calls. Some calls may impose a 'disbenefit', such as unwanted direct marketing calls, nuisance calls etc. The sophistication of the ex-directory options and the downstream services and products provided (eg direct marketing opt-outs, call completion only) can increase the probability of the recipient obtaining a benefit from calls. But some calls may continue to impose a disbenefit on call recipients.
Business directory entries
F.39 For business customers, the situation is likely to be different. When the call recipients are business customers, they may expect to receive a significant benefit arising from the call. (This is one reason that many businesses arrange to pay for part or all of the costs of the calls that they receive using local call rate (eg 0345), or freephone (eg 0500).) The externality may also be more relevant than for social calls between residential customers, because there is less likelihood of a balance of calls between caller and call recipient (eg customer uses a directory service or product to find the number of a plumber, but does not expect a return call from the plumber). The distribution of benefits, therefore, provides an argument that some of the directory information costs should be recovered from business customers with directory entries. This would reduce the size of the costs to be recovered from downstream services and products and so tend to encourage use of those services and products, from which the business customers derive a benefit. Of course, this type of reason explains why business customers are willing to pay for entries onto classified directories (eg Yellow Pages, Thomson). In principle, there seems little reason why this approach should not be extended to other directory services and products.
Summary
F.40 The proposition from the consideration of cost causation is that customers with directory entries demanding complex entries could be asked to pay for the costs incurred. In principle, the costs that are caused by the demand for a complex entry should only be incurred if the benefit to the customer from having a complex entry is at least as large as that cost. Setting a price for complex entries equal to the cost incurred would provide such a test.
F.41 The demand for complex entries comes primarily from business customers. The argument concerning the distribution of benefits for business customers also suggests that it may be appropriate for them to pay for some of the costs, because of the benefit that business customers derive from receiving calls stimulated by the directory service or product.
F.42 Cost causation suggests that it may be reasonable to charge residential customers for a complex entry. But for residential customers who do not demand complex entries, neither of the principles of cost causation nor distribution of benefits provides a compelling reason for charges to be levied.
F.43 This assessment is rather different from BT's current charging
structure. BT's (relatively small) cost of simple entries is charged to
the Access business, ie to be recovered from the customers with directory
entries through their retail bills. BT recovers the costs of complex entries
from revenues for downstream services and products. It levies direct charges
on customers with directory entries only for special phone book entries,
where additional words or special typefaces are demanded.
