Foreword by the Director General of Telecommunications
Chapter 1 Introduction
1.1 What are Broadband Switched Mass-market (BSM) services?
1.2 Objectives and Scope
1.3 Timing
1.4 Regulatory Responsibilities
1.5 The Structure of this Document
Box: Interactivity
Chapter 2 The Principles Guiding this Document
2.1 Introduction
2.2 Key principles
2.3 Any-to-any connectivity for customers and open access for service providers
Chapter 3 Evolution towards BSM: future development
3.1 Introduction
3.2 A market model
3.3 The current market place
3.4 Transition to a switched broadband network
3.5 Digital broadcasting
Chapter 4 Market Access, Market Power and Market Structure
4.1 Introduction
4.2 Access to distribution systems
4.3 Conditional access and common transmission standards for BSM networks
4.4 Vertical integration
4.5 Copyright and some lessons from PRS
Chapter 5 The Basis of regulation
5.1 Introduction
5.2 The distinction of dominance
5.3 Network Pricing
5.4 Universal Service
5.5 Technical interfaces and standards
5.6 Protecting the Consumer
Chapter 6 The Regulation of Dominant Distribution Systems
6.1 Introduction
6.2 Proposed regulatory framework
6.3 Probable coverage
6.4 BT
6.5 cable PTOs
6.6 other PTOs
Chapter 7 Summary, proposals and questions
Annex A brief history of Premium Rate Services (PRS)
Almost all households in the UK have television and the telephone. Many have a PC. These once separate devices are beginning to be linked and used in new combinations - for work and leisure. A new information age is just beginning.
At the heart of this new information age lie telecommunication systems. As telecommunications regulator I cannot ignore, even if I wanted to, the developments in technology and customer demand that are making - indeed in some cases have already made - the information superhighway a reality. This Document aims to stimulate debate on the real implications of current and likely future developments of telecommunications technology and its use. Out of that debate will fall, in due course, the appropriate regulatory action.
Some vision of where we are going is a prerequisite for framing regulation. But it must be a vision based on true understanding - not on the wishful thinking, hype and sectional pleading that we have too often encountered during the preparation of this Document. I hope the debate over the next few months will take us well beyond all that and much closer to a well-grounded vision of where we are going, and hence, of how to get there.
A constant theme running through this Document is the need to encourage investment and innovation by all players in the market. I know investment needs a certain and stable regulatory environment. So I want to establish the right regime, with as little regulation as possible, to encourage that investment.
A lot will depend on the debate started by this Document, for if it is true that the information revolution is to be as important as the agricultural and the industrial revolutions that have gone before, those countries that seize the opportunity will benefit enormously. Those that don't will suffer.
The future is not like the past. And this Document does not take as given current concepts, rules and ways of doing things. It therefore strays into territory that is not Oftel s - but only to ensure that the vision that guides Oftel is consistent with developments in related areas.
Finally, I must stress that this Document is very green. Even when quite firm proposals are made, this is more a reaction against the waffle and inconsistencies encountered in drawing up this Document, than a reflection of the conviction that we have yet got the conclusions right. If these proposals provoke a coherent response as to why we are wrong this would in many cases be a vast improvement on what has gone before. We await your response with a very open mind.
DON CRUICKSHANK
The consultation period will run until 30 November 1995. Comments are invited in particular on the questions highlighted in the text of the Document and listed in the Summary. A separate consultation process is planned for consumers - see 5.6.1.
Written comments should be submitted to:
Mr P Sack
Oftel
50 Ludgate Hill
London EC4M 7JJ
Tel: 0171 634 8928
Fax: 0171 634 8949.
Short electronic mail messages responding to this Document can be sent to Oftel using the form in these pages.
Written comments will be made available for inspection in Oftel's library. Wherever possible respondents are requested to avoid any confidentiality markings. Where such markings are unavoidable, respondents should indicate clearly those parts of their comments which are confidential. Early responses are requested so that others may react to your contribution.
1.1.1 A new era, possibly as significant as the industrial revolution of the nineteenth century, is about to begin. Converging technologies in the delivery of information offer the prospect of a vast array of new services brought directly into the home and the workplace, into schools and colleges, libraries and hospitals. Such services - some already available - range from on-line business information services to educational applications such as distance-learning and remote teaching; from home-shopping and home-banking to television on demand and interactive games; from remote health care to new ways of working, such as in-office video-conferencing and electronic mail.
1.1.2 Governments around the world are promoting such developments. The launch of the US National Information Infrastructure Initiative sparked widespread interest and debate on the advent of a new "Information Age", using "Information Superhighways" to deliver "multimedia" services (all current buzz-words). In February 1995, a meeting of G7 nations discussed progress towards a Global Information Infrastructure Initiative. In the UK, both the Trade and Industry Committee report Optical Fibre Networks (July 1994) and the Government Command Paper Developing Broadband Communications in the UK (November 1994) addressed the advantages of the rapid deployment of networks capable of conveying broadband services and of the services themselves. The UK Government has also announced plans to launch a major Information Society Initiative in the autumn of 1995, intended to raise awareness of the benefits and opportunities of information and communication technologies.
1.1.3 We see three technological developments underpinning future capabilities. These are:
(a) the development of digital technology, producing a significant expansion in the network capacity available (both broadcast over the air or delivered by cable or wire) and an equally significant reduction in the costs of providing such capacity to the end-user;
(b) the development of systems giving the customer control of the information being delivered, for example over timing or destination. Customer control comes when services are switchable (i.e. routed on demand) and delivered over intelligent networks; and
(c) the development of technologies that reduce the delivery costs of broadband switched services to levels approaching those for the delivery of unswitched broadband services (eg satellite broadcast television).
1.1.4 Oftel's analysis on this point echoes that of the Technology Foresight Communications Panel, one of a series of panels created under the auspices of the Office of Science and Technology, bringing together industry, the academic world and Government to identify opportunities in markets and technologies likely to emerge during the next 10-20 years, and the investment and action which will be needed to exploit them. In its report published earlier this year the Panel recommended that the UK should embrace long term technology objectives including: the digitalization of telecommunications, including broadcasting; the deployment of wide bandwidth distribution networks increasingly closer to the individual end-user; and the incorporation of open interfaces in advanced distribution intelligence software to allow a diversity of competitive service creation opportunities.
1.1.5 Not all these services will be new. Video-conferencing, for example, has been available for some time and its use is growing. The QVC channel offers cable and satellite viewers a form of home-shopping, as do information networks such Compuserve in the UK and Minitel in France. For many services, only a matter of degree differentiates the "new" from the "old". Developments in technology may have significantly reduced costs or enhanced quality, for example by substituting images for text or giving control of the delivery sequence to the customer. But in relatively few cases to date has technological development produced novel types of service.
1.1.6 Perhaps the critical dimension to this "new" era is the possibility of delivering and exchanging video-quality images over a switched system at prices that will allow a mass-market to develop. That is what is we mean by 'broadband switched mass-market' or BSM services. With a switched system, individual end-users can request the delivery of individually tailored content, in the form of a particular film, for example, or through individual access to a database. Full switching produces virtually unlimited capacity - the technological equivalent of opening up unlimited television channels in the language of the "old" technologies. Instead of broadcasting moving images over a limited number of channels to a largely passive audience, a broadband switched network allows customers to select what and when they receive (and even send), irrespective of what anyone else is doing.
1.1.7 This Consultative Document concentrates on drawing out the implications of the development of broadband switched systems capable of delivering video-quality images. It is here, in the convergence of television broadcasting and customer control delivering unlimited channels that the major effects of the information revolution are likely to be seen. However, some other technologies may approximate to full broadband switched systems. The advent of digital technology is expanding the number of channels available for conventional broadcasting. Terrestrial broadcasting could command 20 channels, and satellite and cable-based broadcasting over 200 each. Higher bandwidth is also becoming available on conventional telephone networks. These developments are, in themselves, significant.
1.1.8 Despite the current installation of much technologically-advanced infrastructure, including a high proportion of fibre optics both by British Telecommunications plc (BT) and a generation of new PTOs (Public Telecommunications Operators), the point of price competitiveness has not yet been reached. It may be some time before a switched broadband network can match the prices of high-capacity unswitched systems. Nevertheless, the flexibility of such advanced networks and the fact that convergence is coming from both traditional telephony networks and from cable and broadcast television make it important to understand their implications now. In particular, we need to ensure a faster and smoother evolution to the "new" systems and to avoid introducing inappropriate regulation that might hinder their development.
1.2.1 The objective of this Consultative Document is to try, within the areas relevant to Oftel's responsibilities, to ensure that the possibilities opened up by technological developments are harnessed to benefit consumers.
1.2.2 The Document anticipates, as practically as possible, the kind of regulatory regime that will best promote the development of new services in a market still in its infancy. The UK, with one of the most open telecommunications markets in the world, is poised to play a leading role in its growth. But the risks involved in entering this emerging market are likely to be considerable. Thus Oftel aims to ensure that the regulatory environment is best suited to minimise these risks and allow investors a return commensurate with them. We recognise that the development of this market will be an evolutionary process, extending over many years. We are therefore seeking views on how the existing regulatory regime relates to these new services and how it should be adapted in the future.
1.2.3 Our prime focus is on consumers: the service they receive and the value for money they are offered. Consumers themselves are concerned mainly with the end-product - the service offered - and not with the delivering technology. So although new services will rely on technical innovation, we do not see a role for Oftel in selecting a particular technology or, indeed, deciding what types of services should be provided. Our concern is simply to see the development of a regulatory structure that allows the development of maximum customer choice with best value for money.
1.2.4 This is not, however, a Document aimed at the consumer. We intend to issue a further consultative document on the consumer issues for consumers shortly - see 5.6.1.
1.3.1 It is important that we begin to address regulatory issues now. Technological developments mean that broadband switched mass-market (BSM) services could be delivered to customers within the lifetime of current investments. If these services do form the basis of the next economic revolution, then considerable advantage should accrue to countries at the forefront of that revolution.
1.3.2 Companies already investing (or planning to invest) substantial resources in new services will want to know what the regulatory framework will be. At a more specific level, Oftel needs to consider now whether modifications might be needed to licences granted under the Telecommunications Act 1984. Such modifications cannot be made overnight. We also need to consider the position of existing telecommunications operators, in particular to assess whether their potential interest in developing new services might impact on the successor to the present price controls established for BT.
Oftel's role
1.4.1 Oftel's responsibilities are set out in the Telecommunications Act. It is primarily concerned with the economic regulation of telecommunication systems and the services provided over such systems. Under the Act a "telecommunication system" is defined in a way that covers virtually any system that conveys messages, although the services offered by terrestrial and satellite broadcasters are not regulated by Oftel under the Act. Oftel is, however, responsible for regulating the telecommunication systems that convey such services (ie the NTL and BBC transmission systems) and those run by the cable PTOs which offer both telecommunication and broadcasting services.
1.4.2 Oftel has no specific role in the regulation of service content (eg the nature and subject matter of programmes and concerns about taste and decency or impartiality or bias) and - although it has found itself in the past drawn into content issues on Premium Rate Services (see section 4.5) does not consider it should undertake content regulation.
The roles of the DNH and the ITC
1.4.3 The Department of National Heritage (DNH) and the Independent Television Commission (ITC) are responsible for the regulatory framework for broadcasting. The recent policy document, Media Ownership (Cm 2872), made it clear that the Government attaches great importance to preserving the diversity of the broadcast and press media in the UK, as part of our democratic society and to maintaining controls over the content of what is broadcast. The Government has concluded that there is a continuing need for special regulation in the broadcasting sector over and above the Telecommunications Act and general competition law. In this context the policy document put forward proposals on specific regulations governing media ownership.
1.4.4 This Consultative Document recognises the Government's continuing policies on the regulatory regime for broadcasting. It is clear, however, that telecommunication systems will be a vital component in the distribution of any future digital or broadband services. It is also clear that as technological developments such as digitalization emerge and the traditional scarcity of broadcasting channels becomes an issue of the past, and as traditional telecommunication systems begin to offer video-based services, broadcast services will become increasingly difficult to distinguish from other services with a telecommunication service component. Video-based services delivered over traditional telecommunication systems will increasingly look like broadcasting (eg cable television, video-on-demand) while those delivered over broadcasting systems may look like other services with a telecommunications component (eg subscription television, near video-on-demand). For this reason, this Document discusses some issues beyond Oftel's role as the regulator of telecommunication systems and services, so as to comprehend the full implications of current network developments. These developments will mean that the traditional regulatory distinctions between broadcasting and telecommunications will be difficult to sustain. These wider issues are for all the relevant regulatory bodies, not just Oftel. This Document concentrates on the appropriate role for Oftel.
1.5.1 We begin by setting out the principles that guide our approach to our responsibilities, as outlined in section 1.4, in relation to this subject (Chapter 2). We go on to describe how we see the market now and how we envisage its future development (Chapter 3). The Document then looks at market structure issues such as access to the distribution systems, access and billing systems that will underpin the development of new services; and at the implications of vertical integration - defined widely (see 4.4.1) - within the emerging industry (Chapter 4). Chapter 5 goes on to consider why, how, and on what basis regulation of the telecommunication industry might be carried out. Areas covered include an analysis of different concerns relating to dominant and non-dominant operators; the appropriateness of a universal service obligation; technical standards and interfaces; and consumer protection issues. We then consider what this analysis means for the owners of dominant telecommunication systems (Chapter 6). Finally, Chapter 7 summarises the Document's conclusions and proposals, on all of which Oftel invites comment.
1.5.2 This is very much a "green" document, attempting to discuss a regulatory regime for a market that is only beginning to emerge. Much of the content is necessarily conjectural. We hope, nonetheless, that it serves to take this important debate a stage or two further. We seek feedback and especially hard evidence from those active in the market on the soundness of our thinking and on any important gaps or omissions.
1.5.3 Many of the issues raised are extremely complex. We have tried wherever possible to construct a logical sequence of argument, conclusion and policy options, where appropriate. The consultation explicitly asks for comments on the arguments put forward, the conclusions reached and the appropriateness of any policy options identified. Direct questions, numbered sequentially, appear in bold at the end of relevant sections. A full list of questions is repeated in Chapter 7. In order to avoid vague, open-ended questions we have, wherever possible, stated Oftel's current views and, in some cases, suggested courses of action, although always on a consultative basis. Beyond this, we welcome comments on any issue relevant to our inquiry.
1 Our definition of the subject matter of this Consultative Document does not include "interactivity". This is not because interactivity is unimportant, but because it can flow from a number of technological developments, and can have a number of quite different forms. Interactivity can be used to describe some simple kinds of "voting" contained within conventional broadcast programmes. This interactivity is extremely limited, and is achieved by combining the functionality of the telephone network to that of the broadcast network.
2 The other extreme is the interactivity that arises because the customer has complete control of the information that is sent to him. This kind of interactivity requires each customer to have his own dedicated channel, even if that channel itself is not two way. Fully-switched systems do give each customer a dedicated channel. Therefore, in practice, full interactivity will only be available on fully-switched networks.
3 Between these two extremes different systems can give different degrees of interactivity. To use interactivity as a defining characteristic of these new systems runs the risk of confusion, unless the degree of interactivity is specified. Full interactivity would seem to be the appropriate specification, but this is included in switchability. Therefore, we have used switchability as the defining characteristic, rather than interactivity (though we do recognise that an apparently switched service may contain elements of broadcasting, eg accessing Internet video databases). Notwithstanding this, in the text we have in some places used "interactive" to describe these new services. This is because this is the functionality that customers see, rather than the underlying network capability which allows it to happen.
2.1.1 This Chapter sets out the principles that have guided Oftel's thinking on the most appropriate regulatory regime for the development of BSM services. Many flow directly from the policies outlined in the 1991 White Paper, Competition and Choice: Telecommunications Policy for the 1990s (Cm 1461). We have been careful to keep in place the regulatory regime established by that White Paper, as it has successfully promoted the development of effective competition in the UK.
2.1.2 Thus the approach outlined in this Document pursues four complementary goals: to remove regulatory uncertainty so as to facilitate investment and innovation by all potential players; not to undermine the existing regulatory framework; to facilitate continuing investment in competing infrastructure; and to set out a framework for the regulation of the BSM services of the future.
2.1.3 Governments are not good at directing technological advance and there is an argument for taking no direct action at this early stage. Any problems arising in a freely developing market could, it is argued, be dealt with under existing competition legislation as and when they arise. Oftel is very conscious of the importance of encouraging investment in what will be uncertain new markets. However, we believe that, as with the current telecommunications market, some regulatory framework and principles may need to be established in advance. As one of the bodies likely to be centrally involved in the regulation of BSM services and networks, we are increasingly being asked questions about the future regulation of such services and networks by those with an interest in providing them. This Document is an attempt to explore those questions. Another reason is that new services are likely to be provided by companies already well-established in the telecommunications, broadcasting, information services and IT markets such as BT, TeleWest, NYNEX, Reuters, IBM, Microsoft, BSkyB, the independent television companies and the BBC. As the economic characteristics of the emerging markets resemble those of the old, and there may be a tendency for a few large companies to dominate at least the network elements of the new markets, we believe there is a strong case for considering now the steps needed to promote competition and to protect consumers' interests. It is Oftel's view that the following principles, applied sensibly and flexibly, should encourage investment in BSM services within a framework of appropriate regulation.
The interests of consumers
2.2.1 Oftel's overriding principle is to obtain the best possible deal for the consumer in terms of the choice of services available, their quality and the value for money they offer. In the context of BSM services (and their substitutes) we are keen to see the rapid deployment of new services, at affordable rates and on a fully competitive basis.
The development of services
2.2.2 In common with the approach adopted by the Trade and Industry Committee and by Government, this Document recognises that attention must focus on the promotion and development of services as well as infrastructure. The individual consumer is chiefly concerned with the nature, content, quality and price of services, not the means of delivery. Regulation should, as far as possible, be technology and distribution system neutral.
Private sector finance
2.2.3 Innovation and market development will be financed primarily by private sector investment. The public sector's role will be concentrated in certain areas, such as health and education. And while publicly-assisted projects are welcome, such as those underway in Europe as part of the follow-up to the report Europe and the Global Information Society (the Bangemann report) presented to the European Council last year, they should form only a small part of the overall picture.
Stable and flexible Regulation
2.2.4 As the development of BSM services will be market-led, investors will need a stable regulatory regime to create the right conditions to attract private investment. The 1991 White Paper provided that certainty for investors in traditional telecommunications and in cable networks. Oftel hopes that consultation initiated by this Document will help create a similar degree of certainty to support investment in the interactive world.
2.2.5 This does not mean that regulation should be fixed for all time. On the contrary, regulation must be sufficiently flexible to keep pace with technical and market developments. This is particularly true of an emerging industry such as this.
The importance of competition
2.2.6 Experience has shown that promoting competition in both infrastructure and services represents the best way to achieve our overall objective in traditional telecommunications. Oftel would expect to promote the same competition-policy approach and to apply the same competitive principles to the BSM world. Of course the market for BSM services will be new and only a part of the overall market will fall within Oftel's remit. But as Chapter 1 makes clear, telecommunication systems - as broadly defined - will play a key role in conveying BSM services, and these will fall squarely to Oftel to regulate.
Co-operation and collaboration
2.2.7 An emphasis on competition should not rule out co-operation and collaboration between interested parties (subject, of course, to general competition law and, in some cases, to provisions in relevant Telecommunications Act licences). There are likely to be some real differences between this sector and traditional telecommunications. The case for collaboration and joint venture funding may be strong unless it has anti-competitive effects that outweigh the benefit to the consumer.
Dominant operators
2.2.8 The evolution of this new market will be undertaken by a range of operators and companies, each at a different stage of development. Some may be small, start-up companies operating in niche markets. Others may be large players already active in entertainment, broadcasting, publishing or telecommunications. With their market presence established from the outset, some of these companies may quickly establish a degree of market dominance that could be used in an anti-competitive way. This supports the case for different forms of regulation according to the extent of market dominance - again, a principle that has been tried and tested in the regulation of narrowband telecommunications (and elsewhere). But as this is a new market, its boundaries (and those of the sub-markets within it) are likely to develop and change. As a result, any assessment of dominance will need to be flexible.
QUESTION 1
Oftel would welcome comments on the appropriateness of the key principles to be applied to the regulation of BSM networks and services, outlined in 2.2.1-8.
2.3.1 A further principle for consideration is that of "any-to-any connectivity" between customers which underlies the regulation of narrowband switched networks. This principle ensures that any telephone can be connected to any other, regardless of the network used. As well as promoting maximum connectivity (an obvious consumer benefit), application of the principle stops dominant operators isolating the networks of their competitors, thereby rendering them unviable.
2.3.2 Ideally, the rationale supporting the principle of any-to-any connectivity would apply equally to broadband switched networks. There are however a number of difficulties in applying it in practice in the BSM world. The "any-to-any" principle in narrowband telecommunications works only at a relatively basic level of service - basic telephony; in the BSM world sophisticated network interconnection would be required for any single customer to be able to access any service provider on any distribution network via the particular distribution network to which he is attached, ie a complete parallel to the basic telephony "any-to-any" functionality. It would be arguably inappropriate to attempt to impose an obligation to provide this kind of access on emerging BSM networks.
2.3.3 However, we would expect the broadband market to provide "any-to-any" connectivity for customers in the long term, just as the narrowband market has, because this should be in the interests of distribution network owners. And we believe the regulatory regime should act to encourage that objective, though not to require it.
2.3.4 There is also the question of whether a distribution network owner should be willing to accept any service provider onto his network. This concept was supported by many with whom we spoke in the preparation of this Document. Content creators and service providers in particular were keen to see the introduction of a regulatory regime that guaranteed them access to distribution systems and thus to customers. Some network owners were themselves ready to embrace this objective and saw clear advantages in being able to provide alternative service offerings (noting in passing that they were keen to recruit additional service providers but had difficulty finding them).
2.3.5 Others, however, recognised that there is an inherent conflict between granting access to what may well be competitors and attracting investment, especially that needed for the continued installation of competing infrastructure. This represents a powerful argument and we would not wish to impose an open access obligation across the board.
2.3.6 But allowing a BSM network owner with a dominant position in the market to refuse to connect with other service providers could have significant anti-competitive effects on the service provision and content creation markets and could also serve to inhibit the development of competing distribution networks. The implications of market dominance are more fully discussed in Chapter 4. Our provisional conclusion here is that we would expect to have to regulate for open access for service providers only in the case of dominant operators. If this regulatory approach for dominant operators is adopted, we would expect non-dominant operators to follow a similar approach, and to offer access to attractive service providers, in order to be able to offer their customers a similar range of services: but that decision would be theirs to take, not one imposed by regulation.
QUESTION 2
Oftel would welcome views on this analysis of any-to-any connectivity for customers and open access for service providers. And, in particular, whether open access for service providers should only be required through regulatory action when the network operator is dominant.
Return to Table of Contents
3.1.1 This Chapter looks at the likely evolution towards BSM services. It proposes a four-market model as a useful and convenient way of analysing the probable market, with different segments concerned with content creation, service provision, distribution networks and consumer equipment. The differing economic characteristics of these four market segments will require differing regulatory approaches if the goals articulated in 2.1.2 are to be met.
3.1.2 The Chapter also considers the current market place and the probable transition route via switched wideband networks and digital broadcasting. Oftel's preferred approach, outlined at the end of the Chapter, is to concentrate on the end-point of convergence - broadband switched mass-market networks - and then to test what regulation, if any, is appropriate during the transitional period.
3.2.1 Despite a number of uncertainties as the market seeks to establish itself, it seems most probable that BSM services will develop as a number of parallel and overlapping markets, evolving over time. Within the overall market, four very broad market segments will most probably encompass all activities associated with BSM services:
Different economic characteristics of the four markets
3.2.2 If this four-market model represents a sensible approach to thinking about BSM services, it raises a number of issues for the regulation of the wider market. The four segments have significantly different economic characteristics of production and consumption. Customers are likely to be primarily (but not exclusively) interested in the output from the content creation market. Service providers, network owners and suppliers of consumer equipment are all intermediaries. Content is characteristically expensive to create but very cheap to duplicate. As an industry, content creation tends to depend as much on people as on access to capital goods or to materially scarce resources and the variety of content available is considerable. Organisations are therefore unlikely to obtain long-term market dominance in content creation alone, unless combined with market dominance in some other area.
3.2.3 Distribution networks have a different set of characteristics. Traditional telecommunication and broadcast networks are highly capital intensive. Once committed, these costs are largely sunk. Although the physical and technical limits to network duplication are reducing quite rapidly, for crucial elements there may still be an absolute limit to the number of possible networks - because of shortage of radio spectrum, for instance. This market is characterised by dominant operators who are now subject to limited competition through technological change and liberalisation. We have yet to see effective competition across the board, however. Market dominance exists and there must therefore be a real risk of abuse in the short term. Taking a medium- to longer-term view, we would expect growing competition to reduce the possibility of such dominance, though its potential must always be recognised.
3.2.4 In financial terms, service providers will most probably handle transactions between customers and content providers over BSM networks. In broadcasting, service providers have traditionally acted as the principal in the transaction: a service provider buys the content which it then resells to the customer. In this case, the service provider is held responsible for content. With traditional telecommunications, by contrast, when network owners have assumed the role of service providers they have usually acted merely as agent to the transaction (though this has not always been made clear to the customer). Distribution network owners have not, therefore, been held responsible for content. The reaction of consumers to service providers rather than network owners taking this role may well determine where such responsibilities will lie in the long term.
3.2.5 The regulatory position of service providers - using a definition that goes wider than that used in this Document - was considered in the Consultative Document published by Oftel in December 1994, A Framework for Effective Competition. The Statement issued on 25 July announcing the outcome of that consultation process noted that while there were few calls for radical change to the existing regime for service providers, discussions held during the consultation period did reveal a level of unfocussed dissatisfaction with the current regime. It stated that further work was planned to discuss these issues with service providers and network owners and consider proposals for change. This further work will naturally take account of potential BSM service providers and the issues raised in this Consultative Document.
3.2.6 We anticipate a normally competitive market for most types of consumer equipment. Historically, such equipment is manufactured by a large number of competing firms and sold in highly competitive retail markets. Entry barriers are generally low and the market is open to a high level of product substitution. Market domination through production and/or retailing alone seems unlikely, although the use of proprietary standards may give such domination and may need to be monitored. Efforts to extend their influence by firms with significant market dominance in related markets must still be subject to careful scrutiny. (The special position of set top convertors is addressed in section 5.5).
Market interaction
3.2.7 The interaction between players in these different market segments is likely to be varied and complex, depending on the nature of the service being provided. For example, advertisers may be willing to pay distributors to gain access to customers. Those offering transaction-based services may also be willing to bear the cost of distribution. Some services such as films and sport will be bought in by service providers and may be charged out on a subscription or pay-per-view basis. Some companies might will want to specialise in just one of the above market segments while others may be active in two or more. As content creation and service provision are higher up the "value chain", it seems likely that network owners will seek to migrate in that direction, offering a combination of services beyond simple network conveyance.
3.2.8 The marketplace should also become increasingly international. This is inevitable. It is difficult, if not impossible, to prevent digital signals crossing international boundaries. The UK's regulatory regime should therefore encourage service providers and network owners to operate in international as well as domestic markets.
3.3.1 If we now turn to the current state of the market for BSM services delivered by broadband telecommunication networks, we find there is little, as yet, on offer, either in the UK or elsewhere. Videotron recently launched an information service for business users in Westminster and the City of London. The same company also offers information and games service to residential customers, using the Videoway unit, as part of a cable television service. Apart from these, a number of trials are planned or under way: for example, trials run by Cambridge Cable, BT and others in the UK and, further afield, the Time Warner Full Service Network trial in Orlando, Florida. A recent Ovum report noted over 50 such trials set to take place in 1995. But there is little hard evidence on which to base our assessment of future markets. Certainly the overriding impression given by such operators is that so far, trials have been as much technology-driven as market-driven.
3.3.2 Some trials have also run into difficulties, such as those in Rochester, New York, and the Castro Valley, California. In the UK, BT postponed the market trial of its Interactive TV service, now about to be launched in Ipswich and Colchester, from a proposed 1994 date to allow the development of a full range of services in addition to video-on-demand. These delays and difficulties suggest that neither the technology nor the services themselves are currently readily available. Without necessarily calling into question the long-term development of BSM services, such problems suggest that developments will be slower and more piecemeal than anticipated. Certainly, no "killer" application has yet emerged to kick-start the market. In many cases, the delivery via telecommunications of an interactive service such as video-on-demand simply substitutes one delivery mechanism - which may have no price advantage - for another that already exists.
3.3.3 Indications of how the market might develop - and the services that could become available - come from a few services already delivered over telecommunication networks. The current operation of the Internet provides one such example: this is discussed below. Another is the development of Premium Rate Services (PRS), covered in more detail in the Annex, and the videotex services of Prestel and Minitel. We should not forget that the financial information and dealing systems underpinning the financial service industry are essentially telecommunication systems.
3.3.4 Given the likely costs involved and the generally limited resources and information needs of residential customers, most BSM services might be aimed at the business market, in the early stages at least.
3.4.1 Services with some BSM characteristics are already being provided - with some commercial success - over today's networks. The Internet is the most obvious example. Although predominantly used for electronic mail and the transmission of data files, it has an interactive capability that is being exploited in a number of areas, especially in the US with the development of electronic shopping malls and the provision of information on Government. Developments are in hand to provide video-conferencing facilities. Internet connections are growing rapidly, as a result of increasingly wide connectivity and growing access to a wealth of information databases.
3.4.2 But text and static colour images - rather than moving images - form the basis of many Internet transactions. Even for these images, reception can be slow for the many users connected via an analogue telephone line and a modem.
3.4.3 The Integrated Services Digital Network (ISDN) offers the most likely migration route towards a BSM future. Based on existing telecommunication networks, it is now widely available throughout Europe, the Far East and North America, providing a customer-to-customer switched capability and offering a potential base for a range of switched services. Video-phone and video-conferencing capabilities already exist, using dedicated terminals or suitably equipped personal computers. The technology could also support a range of other interactive applications such as co-operative working or information acquisition. While falling short of the picture quality associated with traditional television or video, ISDN offers the scope for high quality "stills" and is adequate for information retrieval purposes. There are, however, significant price barriers to connection to the ISDN: usage charges are based on the bandwidth used (in proportion to the bandwidth used for normal telephony) rather than on the cost of provision. Although the UK market is now seeing some growth in connections, statistics compare unfavourably with the numbers of connections in Germany and France, where connection charges are significantly lower. There are also significant price differentials in terminal adaptors, possibly attributable to the smaller UK market.
3.4.4 More evidence is needed to determine whether the relatively restricted growth of the ISDN market in the UK is caused by the charging structure, by the lack of suitable applications and services on offer, by poor marketing or some other cause - perhaps by a combination of all these factors. This is an issue that Oftel will be addressing in the context of the consultations on the price cap review which will begin in the autumn.
3.4.5 Both the Internet and ISDN are fully switched services, though of less than broadband capacity. They share some of the characteristics of the four-market model outlined above. Services provided over these networks are usually offered by third parties, rather than those responsible for transportation. So far, at least, these systems do not appear to have been held back by any anti-competitive behaviour on the part of any owner of the components necessary to provide services to end customers. Both ISDN and the Internet demonstrate that, given the right technological and commercial environment, there is a potential market for switched services that require bandwidth higher than normal telephone services or data transmission.
3.5.1 In contrast to ISDN and Internet, the development towards BSM services from broadcasting technologies starts with a broadband capability, with satellite broadcasting and the cable television networks. The limited number of channels available naturally prevents switching. But by increasing the number of channels available, these technologies can approximate to a fully switched capability.
3.5.2 Again unlike ISDN and the Internet, broadcasting does not obviously conform to the four-market model. Individual sub-markets tend to be highly bundled; service providers in particular have enjoyed exclusive access to particular channels and until relatively recently, have traditionally produced their own content.
3.5.3 The Government is expected to announce its proposals on the introduction of terrestrial digital television shortly. The effect of introducing digital technology will be to enhance the capacity of that medium significantly. If anything, progress towards the development of satellite digital broadcasting might proceed in advance of terrestrial broadcasting. The advent of digital broadcasting will significantly increase the number of channels available although it might not necessarily alter the structure of the market. Projecting the current broadcasting model onto this increased capacity, service providers would remain as gatekeepers, via ownership of a delivery system (cable television) or conditional access system (satellite and terrestrial broadcasting).
3.5.4 Full interactivity does not seem a realistic option for broadcasting networks, thereby significantly reducing the types of services that could be offered over them. Shopping mall-type services and transaction-based services generally seem unlikely, for example. Some interactivity could be achieved via a return path provided by another network, such as the PSTN (the Public Switched Telecommunication Network, ie BT, Mercury and the other PTOs).
Conclusion
3.5.5 This analysis of the transition towards a BSM future suggests that intermediate systems possess very different characteristics, even if they may eventually converge. Different forms of regulation may be required to encourage each system type to provide the maximum range and diversity of services to customers. This regulation might also differ from present arrangements.
QUESTION 3
Oftel would welcome comments on its analysis of the future development of the market for BSM services set out above and on its proposed approach to encouraging the development of those services by basing regulation on an assessment of the relevant markets for assessing competition issues as described in section 3.2.
Return to Table of Contents
4.1.1 Despite considerable uncertainty about the precise nature of future services and the way they will be delivered, we nonetheless feel confident in identifying some key characteristics of the world in which BSM services will develop. The distribution networks underlying this development will ultimately be: switched, digital, broadband, and mass-market. We start therefore with a market in which no organisation is the dominant provider of the core distribution network. But certain players already have a strong market position in one or more of the existing distribution networks that may form the basis of future networks. Players may also be gaining market dominance in one or more related segments. In some cases, this means vertical integration - or vertical linkages, see 4.4.1 - centred on a distribution network.
4.1.2 A high market share is in itself not necessarily a bad thing, if the actions of market players are kept in check by market forces and there are no significant barriers to entry. High market share might, for instance, be the result of greater efficiency. The potential for one or a very few players to dominate the BSM market seems to us to be very real. As Chapter 2 points out, the provision of BSM services is likely to be the province of large, well-established players (see 2.1.3). The creation of distribution networks in particular is likely to be a very expensive exercise and a potential deterrent to market entry. This could carry significant consequences for customers in terms of choice and value for money. Arguments in favour of new kinds of regulation must nevertheless be balanced against the dangers of creating a form of regulation that would seriously retard the emerging market. Market dominance might be avoided - but at the cost of slower growth or less innovation.
4.1.3 We believe that in spite of all the uncertainties inherent in forward projection, it is possible to develop a regulatory strategy that would encourage the development of new services. The rest of this Chapter attempts to set the groundwork for such a regulatory strategy by looking at a number of issues relating to the structure of the emerging BSM market and how they might affect the development of effective competition.
The Principle of Access
4.2.1 Chapter 2 recognised that there would be tension between granting access to distribution networks to potential competitors and attracting investment, especially for the continued installation of competing infrastructure. At the heart of this tension lies uncertainty over the distribution of costs. Who will fund the total "package" necessary to deliver content to end-users? Related to this question, how will the end-user actually pay for content and for using the network?
4.2.2 New distribution networks will require considerable investment before they become viable. We need to consider whether this investment will be forthcoming solely for the running of a distribution network. If the answer is no, would investment be attracted if the distribution network were tied to some other product with potential for conferring market dominance? And if so, what other product or products?
4.2.3 The four-market model suggests three possible links. Content could be tied to a distribution network, either directly or through service provision. Some non-content services (as, for example a particular navigation system) or particular types of customer equipment (set top convertors, for example) could also be tied to a delivery system. All three markets could thus offer a degree of market dominance. The most significant concentration of such dominance would flow from certain forms of content which are most attractive to customers, such as major sporting events or particular films. Where content is readily open to close substitution, its ability to confer dominance is more limited, but where unique and attractive content is controlled by a network owner it is likely to be used to anti-competitive effect.
4.2.4 It is possible, therefore, that the owner of a particular distribution system might attempt to gain exclusive access to some content and then to use that content as leverage to attract new customers for other services as well. Generally, no content supplier would wish to have an exclusive deal with only one distribution network. However, this is not always the case and we have, for instance, seen "bidding wars" for exclusive rights to some sporting events (eg live Premier League soccer).
Thus it can be argued that closed systems operated by dominant operators are likely to be anti-competitive because they generally reinforce the position of the network in related market segments. (Closed systems are those where the network operator limits the access that is given either to service providers or customers or both - the BBC transmission network is an example of a closed system).
4.2.5 The effect of this is quite complex. At its most stark, the owner of a dominant distribution network could attempt to use exclusive access to unique and attractive content as a way of preventing any new entrant to the market. As the incumbent would most probably be large and well-funded, the potential for market disruption would be correspondingly wide. For the new entrant with a small customer base, the cost of meeting such action head-on would most probably be prohibitive.
4.2.6 This suggests that competition between distribution networks could be distorted - and market dominance created - if a network owner secures exclusive access to unique and attractive content.
4.2.7 There are cases, however, where a new entrant to the distribution market might be willing to bear the costs of securing exclusive access to content, to persuade customers to join him. The potential to distort competition in this case is clearly limited by the small size of the new entrant's customer base. Some additional "incentive" to encourage customers to switch networks might actually make the market work better, by diluting market concentration.
4.2.8 We also need to take into account the interests of content suppliers and service providers. If distribution capacity is limited at the customer end, then a dominant owner might exercise market dominance over content creators or service providers, or both, by dictating the conditions under which content is made available to customers. Dominance in this case would be derived from a threatened refusal to convey such content to users.
4.2.9 In practice, a non-dominant distribution network would have very limited opportunities to act anti-competitively by exclusivity, by refusing to supply content, or even by overpricing services to customers. Given all the other difficulties of entering this market, such as infrastructure costs, and the presence of more established operators, we have concluded that:
4.2.10 Dominant networks should be in a very different position. The market dominance that comes with any degree of monopoly access to customers, content or service providers demands very different treatment. Exclusivity could be used to stifle competition in distribution networks, just as closed access could be used to distort the market for content. We have therefore concluded that:
4.2.11 This analysis also suggests that non-dominant network owners choosing to restrict access to their systems should exert little market power. From a consumer perspective, owners of dominant networks that grant open access would almost certainly prove more attractive, as they would provide access to a much wider range of services. From the service providers' and content providers' point of view, the network with the largest number of potential customers will generally be the most attractive, providing an acceptable commercial arrangement can be found. If open access becomes a condition for dominant operators, we would expect most, if not all, networks to follow suit in a mature market. But this would be a matter of individual choice for non-dominant networks, not a requirement imposed by regulation.
QUESTION 4
Oftel would like to see regulation along the lines outlined in this section, with dominant distribution network owners required to grant open access to service providers and with consideration given as to whether exclusive arrangements with content creators or service providers are appropriate. It is by no means clear that the implementation of these conclusions is entirely for Oftel. We would thus welcome comments both on the analysis and the conclusions contained in this section of the Document.
Access in practice - interconnection
4.2.12 Having discussed the principle of access to BSM distribution networks, we now turn to practical issues. Broadband switched mass-market networks will, in the longer term at least, need to be interconnected in some way. Continuing debate over the terms of interconnection in narrowband telecommunications underlines two important points. First, the connection of systems and especially of competitors' systems is vital to the creation of a truly competitive environment. Second, agreeing terms of interconnection between operators, particularly for charges, has proved very difficult. (Oftel's Statement, Effective Competition: Framework for Action, published on 25 July sets out our latest proposals on future charging arrangements for interconnection.)
4.2.13 For BSM interconnection there is an important opportunity of putting in place an effective framework for interconnection before services are launched commercially.
4.2.14 As with narrowband (telephone) services, interconnection for broadband services implies the ability to pass messages across another operator's network in ways that are both transparent and commercially non-discriminatory. But will interconnection for broadband services bring additional requirements? Once they are physically connected, for example, customers will need directions telling them which service provider to "call" and how to do it. On narrowband systems these directions are largely provided through external directories and advertising, and connection is made by dialling telephone numbers. On broadband systems, much more can be achieved through the network itself, via on-line navigation. Such navigation systems might have a significant influence over customer choice
and therefore a potential impact on the market for content. They also provide opportunities for market distortion which may call for additional regulation.
Access in practice - Access to navigation systems
4.2.15 If the provider of the navigation system is also a content or service provider (or has a preferential agreement with one) information can be displayed in a way that benefits that particular service provider. In a slightly different context, the control of information-sequencing in airline computer reservation systems had a significant impact on ticket sales. Airlines listed on the first page of the display obtained many more bookings than those listed on subsequent pages, even if the services offered later met customers' requirements better. Competition authorities have intervened to ensure that airline services are listed in a manner that does not distort competition. There are, of course, significant differences between the purchase of BSM services and airline tickets: customers' relationships with the media have tended to be long term and with a particular favoured supplier. But there is no certainty that such a relationship will continue in the future and, in any event, it would not invalidate the analogy.
4.2.16 In terms of our four-market model, navigation systems are something of a hybrid, forming both a "necessary" part of the network and a separate service in their own right. Within one network, customers could have a choice of a number of different navigation systems.
4.2.17 Given the way a navigation system could distort the market for content, regulatory concern and action should depend on whether or not it is tied to other market players. If customers have a choice of navigation systems, then competition should tend to temper any market distortion in content resulting from the way a navigation system arranges its information. If the navigation system is tied to the network, its potential for market distortion is much greater, especially if the network owner also provides content or other services.
4.2.18 Regulation of navigation systems to prevent undue discrimination against content providers would seem necessary in the following circumstances:
4.2.19 If the network owner had a dominant position in the provision of BSM network operation, it could be argued that even in these circumstances the actual potential to distort the content market would be minimal. Any such distortion attempted would just result in customers leaving that network. However, the transaction costs involved in moving to another network might well serve to inhibit a customer doing so and thus make that mechanism rather weak.
4.2.20 In the first instance, Oftel's view would be that regulation would be required only for navigation systems on dominant switched telecommunication networks when that network owner is also a content/service provider and there is a lack of effective competition between navigation systems on that network.
Access in practice - numbering
4.2.21 In narrowband telephony navigation - choosing one destination from an array of possible destinations - is achieved through the use of "numbers" input by the customer. In gaining access to, and moving around within, BSM services it is likely that customers will use screen-based icons or menus with simple hand-held remote control unit. Alternatively, the present day "point and click" mouse type interface could be used. In either case, traditional selection by eleven digit numbers is unlikely to occur. However, the distribution network will need to use such numbers to establish and modify connections when connecting customers to BSM services.
4.2.22 If network numbers are required for BSM services, the issue arises whether any PSTN number can be used or whether a new range - using perhaps one of the vacant "S digits" - should be allocated for the purpose. There may well be network-based functions, such as "service barring", analogous to call barring in telephony, enabling customers to restrict access to high-cost services or those with certain types of content, which would be easier for the network owner to implement and for the customer to control, if a specific range of numbers were allocated for this purpose.
4.2.23 Following the introduction of the extra digit on PhONEday in April this year the provision of the additional numbers needed to cater for the widespread provision of BSM services should not be a problem. If the principle of a distinct number range for BSM services is agreed then Oftel would propose to consult on any sub-structure that might be needed.
QUESTION 5
Oftel would welcome comments on the conclusions reached in this section. In particular, that regulation would be required only for navigation systems on dominant switched telecommunication networks when that network owner is also a content/service provider and there is a lack of effective competition between navigation systems on that network. In addition, comments are sought on the proposal to allocate a specific number range (up to a billion numbers, behind a special 0X-- digit) to BSM services, and the issue as to whether Oftel should consult further on the structure and availability of these numbers.
Access in practice - payment systems
4.2.24 Another access issue to consider is the choice of method of payment for BSM services. Oftel has approached this issue on the basis that it would not expect to become involved in the way customers pay for BSM services unless payment systems operated against their interest or had an anti-competitive effect.
4.2.25 An end-customer could have a contract with the network owner for the provision of the complete package: transportation, service and content. Broadly speaking, this is how narrowband information is provided over the telephone network as part of PRS. Alternatively, the customer might have a number of separate contracts with different service providers. A parallel can be drawn with narrowband Internet services, for which customers are likely to have a contract with the PTO for local transport, a contract with a service provider for navigation and facilities for electronic mail etc, and further contracts for any information delivered over the network or for any goods bought via the network.
4.2.26 Both types of system bring advantages and disadvantages to customers. Under the first, billing is simplified but the customer is in a weaker position if the service or content proves unsatisfactory. Indeed, under the present narrowband PRS model, customers can find themselves in an extremely vulnerable position as any refusal to pay for content (for example, because the service delivered was not as advertised or because the use of the service was not authorised by the bill-payer) may lead to disconnection of their telephone service. Separate contracts produce a more complex billing system. The need to establish a new contract with a new service provider or content provider could, in practice, mean that services are harder to obtain.
4.2.27 A PRS-type solution is likely to be even more unsatisfactory with broadband services. The value of the content is likely to be much higher than the value of the transportation. Tying the two transactions together and using the transport bill to pay for both is unlikely to be satisfactory, unless the provider of transport takes responsibility for content as well (a role the PTOs have refused with PRS). If services are bundled together at all, the higher value content or service provider is more likely to bill for both parts of the service, rather than the transportation provider.
4.2.28 This suggests that transportation should be separated from the provision of service. For reasons similar to those outlined above (4.2.1 to 4.2.11) we would expect to insist on such "unbundling" for dominant networks and leave competitive pressures to encourage other networks to adopt this mode of operating, at least in the medium term.
4.2.29 The points made above about navigation and payment systems lead us to expect service providers to have a direct relationship with customers, and for dominant networks we would expect to regulate to ensure that this was possible. However, in addition to making sure that this is possible it would also be possible to forbid any other type of arrangement. Or it would be possible to allow the network owner to act as a billing agent for service providers. If it was still possible, on what conditions should such an arrangement be allowed?
4.2.30 The advantage of allowing it is that independent, low volume, billing systems, may have considerably higher transaction costs compared to using the network billing system. To allow such systems to be used - providing there is no coercion on the part of the network operator or other misuse of its market dominance -may mean that some services are viable which would not be the case if they had to have their own billing system. However, if it is allowed to be used, and the network owner is allowed to use it for his services, it might make it much harder to ensure that there is a level playing field between different service providers.
4.2.31 On the other hand, there are also developments in the pipeline that would seem to allow low value transactions to take place on telecommunication networks without using the billing system of the network owner. Mondex, currently being tested in Swindon, is an example of what might be possible. If these systems are viable for low value transactions it would mean that allowing network owners to act as a collecting agent would be unnecessary. The value and relative importance of the transactions involved would, to an extent, determine the nature and degree of the network owner's involvement. Generally, we would expect to see low risk, low value transactions undertaken instantaneously over the network with separate billing from service providers for high risk, high value transactions.
QUESTION 6
Comments would be welcome on the conclusion reached in 4.2.31 and on :
Access in practice - Customer information
4.2.32 Although the number of networks may be quite small (probably between three and five), the number of potential service or content providers available to any customer may be vast. Service providers might need to work extremely hard to customise their services, if they are to attract and retain customers. They are therefore likely to want to establish a direct relationship with their customers, rather than an indirect relationship through the network provider. Indeed, without this direct relationship some sorts of services may simply not be viable.
4.2.33 This emphasis on customising services could in turn place a premium on information about customer usage. Such information can be generated from a number of different sources. Where a direct relationship exists between service provider and customer, the former will have some information on customer demand and use. The network provider also has potential access to this information (by monitoring network usage) as do companies supplying billing systems (by tracking the transactions).
4.2.34 Where a network owner also provides a service, it may be necessary to ensure that information on service use is not used to distort the market for services. Similar provisions may be needed to prevent market distortion by dominant billing system owners. Or should fair trading rules be used to control the flow of information from network operations to service providers?
QUESTION 7
Oftel would welcome comments on the provisions that might be needed to ensure that information on service use is not used to distort the market for services, and especially as to whether or not this is likely to be a significant problem.
What is conditional access?
4.3.1 Conditional access is the term used to describe systems that allow individual subscribers access to services such as pay television, the Internet and on-line databases. For all these services, access is conditional on the service provider being able to recoup the cost of the service from the consumer, eg from payment by pay-per-view or subscription. Thus these systems need to comprise both techniques for scrambling and unscrambling signals and a subscriber management system that authorises unscrambling only in certain cases (ie where the customer has paid or agreed to pay for a particular service).
4.3.2 In traditional switched telecommunications the ability to grant access is embedded in the network and clearly forms part of the delivery mechanism. The nature of switching and its information storage capabilities allow both ends of a transmission path to be identified, thus providing the means to control both access and use. This also holds true for networks without tangible final connections, such as mobile networks, even though some of the hardware needed to make them work is located in the customer's handset.
4.3.3 This is not true, however, for broadcast networks which require additional control systems, usually referred to as conditional access systems. Pay television represents the most established form of mass conditional access. The introduction of digital television services will mean a greater role for conditional access systems and associated subscriber management systems in the broadcast world, as at least some of the wider range of services to be provided using the additional capacity created by digitalization will be funded on a subscription basis. A recent European Union Directive on advanced television services provides for an appropriate level of regulation for conditional access systems for digital television.
Access to conditional access systems for BSM?
4.3.4 The public debate on conditional access systems has so far focused on their importance in relation to broadcast digital services. However, there may be important access issues arising from the development of fully switched digital services, and this Document attempts to address these. It is possible that the control provided by switching will make conditional access systems as they are currently recognised unneccessary for BSM services. However, it is also the case that those running BSM networks or providing BSM services will need to be able both to control access to those that have undertaken to meet relevant charges and to record and collect the charges that accrue. It is also the case that "switching" in a BSM world is likely to be more complex than it has been is narrowband telecommunications. There may be several different service providers on a single BSM network offering access to customers on varying bases. The complications this would give rise to increase proportionally if a customer can access a variety of networks, and thus a greater variety of service providers, from a single BSM network connection. All of this implies the possibility of the creation of a new generation of conditional access systems for BSM networks and services. In that context, regulatory policies aimed at a narrow definition of conditional access are likely to come under strain if the development towards BSM networks proceeds as we anticipate it will.
4.3.5 If conditional access systems do come to be developed for BSM networks, access to them by service providers is likely to be a key issue. Increasing the number of service providers could mean that each service provider would need a conditional access system to control and bill for services. Clearly, if conditional access systems are expensive, customers may be unwilling to purchase a new one each time they want to access a new service provider. New entrants to the market might therefore find themselves at a considerable competitive disadvantage compared to incumbents.
4.3.6 It is, of course, technically possible that the same conditional access system could be used for more than one service provider and for more than one type of distribution network. We would expect the market to develop in this way. The emergence of a single conditional access system raises questions about the behaviour of those controlling that system and the use of and access to that system by service providers generally.
4.3.7 Such new generations of conditional access systems may have different capacities and for systems with a smaller capacity who would decide which service providers should gain access? On the other hand, denying access to a conditional access system may make switching between service providers very expensive for customers. This would obviate the goal of maximising customer choice. Assuming that conditional access systems do develop in the BSM world it might be sensible to bring them into the regulatory net for dominant networks.
4.3.8 A separate but related issue is often confused with conditional access: the manipulation of telecommunication signals necessary to convert them into a form, such as a moving image, in which they can be displayed to the customer. This manipulation is carried out on the customers' premises in equipment owned (or rented) by the customer. Different service providers could require different forms of manipulation, again requiring additional equipment for each service provider. This problem can arise on switched and unswitched systems, for example, fax machines that cannot communicate with each other.
4.3.9 With digitalization, a very wide variety of services and systems (both switched and unswitched) could use the same manipulation. This could significantly reduce the amount and cost of equipment required by customers to access services provided by different distribution networks. Unlike conditional access systems, manipulation devices will work for all time once acquired - unless they malfunction. Conditional access systems have a time related device in them so that access can be denied at some future date if the customer does not pay.
4.3.10 Commonality of the means of manipulation is a relatively straightforward issue of standardisation. Strict standardisation may stifle innovation, but no standardisation may lead to considerable extra expense for customers.
4.3.11 To attract adequate investment in new services, operators need to be confident that their product will be widely available to consumers, without risk of pirating. At the same time, operators will wish to ensure that consumers are not deterred from switching to their product by the prohibitive cost of further decoding equipment. This would have a negative effect on the market for BSM services. These issues are discussed further in section 5.5.
QUESTION 8
Oftel would welcome views on this brief analysis of common transmission standards, on whether a new generation of conditional access systems are likely to be a feature of BSM networks and services and, if so, on whether it would be sensible to include control of them as part of the proposed regulatory regime for dominant network operators.
Introduction
4.4.1 As Chapter 2 made clear, promoting competition at all levels is central to Oftel's approach to its responsibilities. It is also clear from the discussion above that many access problems arise when one organisation is active in more than one of the four market segments identified in Chapter 3, ie vertical integration. In this section of the Consultative Document we are using the term "vertical integration" to refer not only to vertical linkages in common ownership but to include such relationships achieved by contractual arrangements between two or more independent companies (which can have a similar competitive impact).
4.4.2 Experience in narrowband telecommunications has confirmed that the development of a competitive environment has brought real benefits to the consumer in terms of lower prices, better quality of service and wider choice. We want to see these benefits replicated in the emerging market for interactive services.
Vertical integration of existing players
4.4.3 The players most likely to take an active role in developing this market will be those already active in telecommunications, entertainment and information technology. They will generally be at the larger end of the spectrum. Initial contacts with some of these organisations suggest they will want to play a part in several market segments, extending their reach up the value chain and achieving integration across a number of markets. Control of gateways, such as network interfaces, should further help them maximise returns from the necessary investment.
4.4.4 BT, for instance, is active in the consumer equipment market as well as the transmission market. In discussions on its trial BSM service, it signalled its intentions to play an active role in service provision. The BBC is a player in all market segments apart from CPE. A number of broadband cable PTOs have shown some interest in participating in content creation. But as suppliers of set top convertors, cable PTOs are now present in three out of the four market segments. BSkyB is active in all four, if its relationships with consumer equipment suppliers are taken into account. (Although BSkyB does not own the network used to distribute its services, other entrants must either replicate a conditional access system or gain access to BSkyB's system.)
4.4.5 Vertical integration is not in itself a bad thing and may well be associated with economies of scope and provide a basis for minimising transaction costs. However, the concern about vertical integration is that, when combined with a degree of market dominance, it can give an operator scope for using an unfair competitive advantage. This can be exercised in a number of different ways: preventing others from entering the market in which it has dominance (and thus restricting consumer choice) by allowing cross-subsidy or enforcing contractual ties, for example, forcing customers to take services they may not want. The recent action taken by the Office of Fair Trading in respect of BSkyB's relationships with cable companies illustrates one regulatory response to the dangers in this market of vertical integration combined with market dominance.
4.4.6 In relation to the "media", the Government has already tabled proposals in its policy document Media Ownership (Cm 2872). Any organisation seeking to control companies with significant media dominance would need to seek the approval of an independent regulator. The proposed levels are: 10 per cent of the total UK media market, 20 per cent of any regional media market or 20 per cent of each sectoral market (i.e. television, radio and newspapers). These proposals - subject still, of course, to the consultative and legislative process - would not necessarily prevent vertical integration although they could help prevent any single service provider expanding to dominate the media market as a whole, or part of it. However, the definition of the media is coming under increasing pressure as the boundaries between service providers, including the traditional media industries (such as the conventional broadcasters) and distribution networks become more indistinct.
Service provider/distributor separation
4.4.7 While we have met no general call for structural separation from the outset, many hold the view that network owners and service providers should operate as separate businesses, implying commercial though not necessarily structural separation. In this case, network owners would supply the distribution function only, a "video dial tone" facility allowing customers to call up one or more service providers. At the very least, it is argued that network owners would have to provide access to competing service providers on a transparent and non-discriminatory basis. This would remove first-mover advantage from the network owner and give service providers the customer access needed to support investment.
4.4.8 A contrary view suggests, however, that network owners will make the investment necessary to provide the broadband, switched, mass-market network only if they can participate as service providers and preferably on an exclusive basis.
4.4.9 The immediate concern centres on the issue of access, addressed in section 4.2 above. There we concluded that regulation requiring open access for all service providers on a non-discriminatory basis would be necessary only for dominant networks. But such operators should be allowed to run vertically integrated operations across segment boundaries, otherwise the market for interactive services might be slowed down.
4.4.10 But as we made clear in 4.2, owners of dominant networks must also provide non-discriminatory access to other service providers, guaranteeing the customer access needed to underpin the development of new services. We would thus intend to require the owner of a dominant distribution network to provide broadband conveyance (including switching) as a separate network business for accounting purposes, with published disaggregated accounting information. If a dominant network owner also has a service provision operation, we would expect that service provision operation to publish similar disaggregated accounting information.
QUESTION 9
Oftel would welcome comments on the conclusion that structural separation between service providers and network owners is unnecessary, even for dominant networks. It would also welcome comments on what form of separation is necessary, but only for dominant operators.
Vertical integration of transitional networks
4.4.11 We now consider how vertical integration might affect transitional networks. As stated earlier, such integration is likely to cause problems only when combined with market dominance. As there is no channel scarcity with a fully broadband switched mass-market network, it would be difficult for a service provider, even one vertically integrated with the network owner, to dominate the market for capacity. This is not true for non-switched systems. Here, it would be possible for a single operator to gain control of a significant proportion of available capacity in a market that has historically been based on exclusive access to scarce capacity. In the transition to the new networks, issues of market dominance and vertical integration are closely linked together. This section attempts to untangle the issues to determine where regulation might be appropriate. In particular, it identifies a number of "pressure points" where different delivery systems could produce a concentration of market dominance.
The present position
4.4.12 At present, essentially four transmission mechanisms might be used to convey services to consumers:
a) traditional PTO type networks, for example BT and Mercury. These networks already provide narrowband, switched, mass-market services (ie telephony) and are likely to upgrade to a broadband capability over the next decade. Around 92 per cent of the population is currently connected to a narrowband switched network;
b) cable PTO networks. These currently provide narrowband switched (ie telephony) and broadband unswitched (ie cable television) services. Upgraded networks of this type are also likely to provide full broadband switching capability. Each cable PTO has a limited exclusivity for cable television only and thus a potential mass-market service (though this exclusivity is not open-ended). At present, however, overall penetration rates for cable television are under 25 per cent for the areas where the physical infrastructure has been built, and only around 7 per cent over all the areas currently franchised. As cable's high installation costs can be recouped only in high-density areas, such networks are unlikely to cover the entire UK population. Taken together, they should nonetheless have a mass-market presence. When completed, cable networks (including new franchises now being let by the ITC) should cover 80-85 per cent of the UK population;
c) direct broadcast to the home by satellite (DBS). This provides broadband, unswitched services, potentially available to nearly 100 per cent of the population of the UK. At present, BSkyB dominates the UK market through its control of attractive film and sports programming and its "Multichannels" package, using the Astra group of satellites. DBS capacity should be enhanced by the move to digital technology, which could increase Astra capacity from 64 channels to well over 200, but it will remain unswitched. An increase in the number of channels available and the addition of a return path (probably using a narrowband telephone network) might approximate some of the interactive characteristics of a broadband switched network. This approximation is likely to concentrate on services like (near) video-on-demand. Such services are channel-hungry, however, and the development of a significant number of interactive services would quickly exhaust the delivery capability; and
d) the traditional terrestrial broadcasters. These offer a broadband, unswitched, mass-market service to 99.4 per cent of the UK population. Digital technology could increase channel capacity from 4 or 5 to around 20. With many more channels, a similar degree of interactivity could be provided as in DBS services, but it is not possible at present with current technology or bandwidth availability.
4.4.13 BT, BSkyB and terrestrial broadcasters are already dominant in their particular areas. Given their widespread distribution networks, they have the potential to become dominant in the interactive services market as well. Cable PTOs, still installing their distribution systems, may become dominant in local areas over a longer time.
4.4.14 There is, however, scope for those current distribution networks without market dominance to affect other players in the market by a form of vertical integration, ie entering into agreements with players in other market segments who themselves have market dominance that have the effect of restricting the freedom of action of those distribution networks. Thus an agreement between one or more distribution network owners and a dominant service provider could well have anti-competitive effects on the players in the service provision and content creation market segments. This set of circumstances would be of concern to Oftel, especially in view of its objective of promoting the creation of a variety of competing innovative service providers, and would lead to the Director General considering whether to use the powers granted to him by virtue of the various PTO licences to require such distribution networks to be open to other service providers on non-discriminatory terms. It is also arguable that Oftel might wish to regulate such distribution network owners in the same way that it is tentatively proposed to require dominant BSM distribution networks to be open to service providers generally.
The move to digital networks
4.4.15 The particular form of market dominance described in the previous paragraph depends on the limited capacity of present distribution systems, and is thus transitional only. As these systems are upgraded or replaced by digital distribution systems and then by fully-switched broadband systems, the ability to establish dominance in this way should be diminished.
4.4.16 Broadcast networks might approach (but not reach) a broadband switched capability through the addition of new channels. Traditionally, channels have been limited in number. Organisations have been awarded a monopoly over one or more channels. Open access has not been a feature of the system, and it is difficult to see how it could be.
4.4.17 Under existing rules for terrestrial broadcasting the BBC has two channels, as do the independent stations (including Channel 4 and S4C). A fifth channel is currently being awarded. BSkyB is the dominant satellite player. These organisations currently "dominate" their channels. They will remain dominant over their existing distribution systems only if they also obtain a majority of any new digital channels. BSkyB has already announced its plans to use the additional capacity provided by new Astra digital transponders to provide a near video-on-demand service, using some 100 digital satellite channels to show a relatively small number of films on a staggered basis.
4.4.18 One problem specific to broadcast services is securing payment for content. The two payment systems for existing terrestrial services - licence fee (BBC) and payment by advertisers (ITV) - may not provide a basis for an extra 20 channels. If payment for these is by subscription or pay-per-view, the means of payment control (or conditional access system) becomes a critical gateway. At present, both BSkyB and the cable networks use conditional access (the latter for the broadcast entertainment side of their networks only). If conditional access systems prove expensive to duplicate and if the issue of conditional access is not sufficiently addressed in the regulatory regime, it might then be possible for one company to dominate the delivery of broadband channels by satellite and by extension, by an expanded terrestrial system as well.
4.4.19 Separate conditional access systems could become less important for switched broadband systems, as both ends of the transmission path can be uniquely identified. See the discussion at 4.3.1-7.
Implications of this analysis
4.4.20 The implications of this analysis are as follows:
a) broadband switched networks are likely to be more capable of operating as open systems than are broadcast networks, offering a relatively easy and direct path between service provider and customer. Regulatory intervention may therefore be limited to ensuring open access and non-discriminatory treatment for all service providers by a dominant network owner, including those linked to the network owner;
b) broadband broadcast systems, by contrast, cannot be completely open. The number of channels available will always be limited. Channel "ownership" or control is likely to be the basis for service provision, making vertical linkages between service providers and channel owners attractive. Furthermore, conditional access must be created as a separate adjunct; such systems may themselves contain the means to reinforce market dominance;
c) economic regulatory intervention (as opposed to content regulation) may be necessary where the need to duplicate conditional access systems is hampering the provision of extra channels and creating unnecessary cost burdens for consumers; and
d) intervention might also be necessary to stop a single service provider dominating all or most of the limited channels available on unswitched distribution systems.
QUESTION 10
Oftel would welcome comments on the conclusions reached in 4.4.20 in relation to the need for regulatory action flowing from vertical integration between players in different market segments.
Market power in practice
4.4.21 The case for regulation depends not just on identifying the potential for market power, but on showing that market power has been abused or that there is real potential for abuse. Our analysis of different delivery mechanisms suggests that broadcast services should also be capable of being delivered over a broadband switched network. In addition, the latter will be able to deliver services that broadcast systems cannot. This suggests that once a broadband switched network is functional, market dominance based on broadcast delivery might be difficult to sustain, even when reinforced through conditional access systems.
4.4.22 Regulated open access for dominant broadband switched networks could also limit any potential market dominance built up through network ownership or control. Dominance could still be exerted through control of content but this would be available to anyone with sufficient resources, irrespective of the delivery system used. The problem should not concern the regulation of telecommunications (and as we point out at 3.2.2, it is unlikely that any organisation would have long term market dominance in content creation alone).
4.4.23 On non-switched broadband systems, open access may not be possible because of capacity constraints, necessitating some form of rationing. Such rationing is likely to be concerned chiefly with content rather than purely economic criteria. Again, these concerns are not for Oftel.
QUESTION 11
Oftel would welcome comments on the conclusions reached in 4.4.21-23, particularly: that once a broadband switched network is functional, market dominance based on broadcast delivery might be difficult to sustain; and that regulated open access for dominant broadband switched networks could also limit any potential market dominance built up through network ownership or control.
4.5.1 As the economic regulator of telecommunication systems, Oftel has no obvious interest in the supply of content, which will largely depend on the exploitation of copyright. We have included a section here for two reasons. First, as content will undoubtedly drive the development of broadband switched networks, we must ensure that any proposals for regulation are set against a full understanding of the market. Second, where content is bundled with distribution, as in the narrowband PRS market, the regulation of transportation prices inevitably implies a price for content as well. So with some reluctance, Oftel already finds itself with responsibilities in this area.
4.5.2 Copyright is fundamental to the development of services on the new networks. Without adequate protection, content creators might not wish to make their works available in this form and the emerging market will be starved of content.
4.5.3 BSM services will be available on-line and on-demand, a form of dissemination that presents unique problems. It enables access to works at a time and place specified by the user while at the same time, digitization provides the means to make perfect copies or to alter originals. UK and European Union (EU) law and international copyright conventions must therefore provide adequate protection for authors of works.
4.5.4 In the UK, copyright is governed by the Copyright Designs and Patents Act 1988 as amended by the Broadcasting Act 1990 and secondary legislation enacting European Union law. A typical on-demand service will be covered by this legislation as a "compilation" or "film", both defined in relatively wide terms. The European Commission is currently drawing up a Draft Directive on the legal protection of databases, which should cover most on-demand database-type services. The Commission will also shortly publish a Green Paper Intellectual Property Rights in the Information Society, covering the key issues of digitization and electronic transmission, clearance of rights, publication and broadcasting rights, and technical protection systems. The World Intellectual Property Organisation (WIPO) is charged with bringing up to date the Berne and Rome Conventions so that they adequately cover copyright and related rights in relation to information superhighways.
4.5.5 Some further questions remain. In particular, to what extent should a network owner be liable for breaches of copyright by those using its network to access protected material? The Copyright Designs and Patents Act 1988 establishes liability only for those "having responsibility to any extent for the contents [of a broadcast]". But the Act also prohibits anyone who transmits a work via a telecommunication system from authorising a third party to infringe copyright. It is open to question whether such "authorisation" could include an operator whose network gives a customer access to protected material.
4.5.6 These issues go beyond Oftel's specific remit and are not considered further in this Document. They will need to be taken up by the relevant authorities.
4.5.7 As Oftel is already involved in the economic regulation of content for PRS, it is worth briefly examining the background in order to assess the wider implications for services in which the value of content greatly exceeds the value of transportation.
4.5.8 The PRS model implies that the owner of the distribution network - not the information or entertainment provider - is the contractor for the complete service (content and transport). The relationship is reinforced when PTOs exercise their right to disconnect customers for non-payment for information or entertainment (ie content) supplied as part of a PRS service, even if the customer has paid for the transportation.
4.5.9 In reality everyone knows that PRS prices contain an "information" price as well as a transportation price. The regulator must necessarily have a view on the "value for money" of these services - a prime factor in price regulation generally. This, in turn, takes the regulator into the realms of content.
4.5.10 Furthermore, the indication of the price of a PRS is contained in the first four digits of the number to be called (ie the dialling code). In its role as numbering administrator, Oftel assigns meaning to number groups. Although Oftel does not formally assign the price of a PRS call to those number groups, it does have to determine the financial transfers between PTOs where PRS calls are interconnected. This cannot be done without reference to the amount paid to content or service providers. Again this drags Oftel into the price setting arrangements for the "information" part of a PRS service.
4.5.11 Oftel has no wish to regulate either the price or content of services provided over broadband switched networks. There is no obvious reason why the content market cannot operate competitively, making price regulation unnecessary. The Director General has no obvious mandate in relation to the content of any particular service; and Oftel holds the view that regulation of content via price should be avoided.
4.5.12 But with an eye to Oftel's experience with PRS, as described in the Annex to this Document, our view is that, unregulated, it is likely that the provision of BSM services via telecommunication networks will give rise to real problems relating to the quality and nature of content, and its value for money. Absence of regulation could entice into the market those intent only on exploiting the customer (or even the network owner) or using the new medium as an outlet for services that could not be provided elsewhere. These issues fell to Oftel to deal with in respect of PRS as it was the only regulatory body with relevant legal competence. The position is likely to be different for BSM services, and the problems will fall to be dealt with by others. The important point is to avoid the same thing happening again.
QUESTION 12
Do others agree that in the absence of regulation there is a risk that there will be abuses in the provision of BSM services as there were in the provision of PRS? If so, who should taking the lead in preventing this outcome?
Return to Table of Contents
5.1.1 Chapters 3 and 4 isolated the salient characteristics of the evolving market for broadband switched mass-market services as we see them. This Chapter sets out in more detail how this analysis might translate into regulatory action.
5.1.2 Oftel has no desire to regulate for the sake of it. Our view, expressed throughout this Document, is that any regulatory regime should promote investment in new and competing networks and services, thereby helping the UK assume a leading role in world markets. There is therefore a strong case for saying that we need only minimal regulation and that the market should be left to decide on most issues. On some issues, however, regulation may be necessary to promote the development of the market, to protect the consumer and to safeguard the interests of other players. This Chapter concentrates on how such problems may be addressed.
5.2.1 Chapter 2 articulated the principle that the degree of regulation should be influenced by the criterion of "dominance" (2.2.8), and the application of this principle underlies much of the analysis in Chapters 3 and 4. This section expands on the application of the principle in practice against the background of the conclusion (in 2.1.3) that some of the players likely to take a lead in developing the BSM services market already have a strong market position in the markets in which they operate. This is especially so in distribution networks. Market strength would allow such companies quickly to establish powerful positions in the delivery of switched (or similar) broadband services, giving them the potential to stifle competition.
5.2.2 Chapter 4 concluded that market dominance could arise in any of the four market segments identified in Chapter 3, but that to be sustainable it required dominance over the distribution network (or its available capacity) or, for unswitched systems, over the conditional access system. Sustainable dominance is unlikely to exist for content without vertical integration with delivery or conditional access systems, and that for current and transitional systems with limited capacity, anti-competitive effects could flow from restrictive arrangements between the owners of distribution networks and dominant service providers.
5.2.3 Oftel's current view is to concentrate regulation - when it is needed - on distribution networks. The aim would be to develop a proactive regulatory regime for dominant network owners (including those network owners that enter into agreements with other market players that have anti-competitive effects) and to apply a more relaxed system of regulation to operators with no market dominance. Oftel has already successfully applied this principle in narrowband communications.
5.2.4 The effectiveness of this approach depends critically on adequately defining dominance. The conventional definition of dominance is the ability to act independently of other participants in the relevant market. However the characteristics of such a position are not straightforward and involve the assessment of a number of criteria. Clearly, market share is the key element since ability to act independently is unlikely to exist with low market shares. However, assessing market shares depends critically on a robust definition of the relevant market and this will require careful analysis. An important consideration in this context is the facility open to some participants to be able to use their dominance in a related market, say telecommunications, to develop a strong market or even dominant position in the BSM market. The inter-relationship between adjacent markets is therefore an important part of the assessment of dominance. In addition to these features, consideration of dominance would need to take account of other characteristics such as the ease of entry into the market, whether there are some costs which could provide the incumbent with a potential price advantage over a new entrant, the number of other suppliers in the market, their relative shares and ownership and linkages with other players or related markets. Assessing the facility to act independently also needs to address particular behavioural characteristics as markets become established. There may well be features other than those noted above of importance for particular markets which would need to be given consideration. Each case would need to be determined on its merits and according to circumstances, and we would explain publicly why we considered any particular operator as dominant before taking regulatory action.
5.2.5 For distribution network owners considered dominant, any regulation would seek to achieve the following aims:
5.2.6 Where an owner of a transitional digital distribution network has a dominant conditional access system (and broadband switched systems do not provide a substitute), regulation should likewise seek to achieve the following aims:
QUESTION 13
Oftel would welcome views on the conclusion that proactive regulation will be required in respect of dominant BSM distribution systems, the definition of dominance used and the objectives of that regulation as set out in this section.
5.3.1 The market for BSM services is still embryonic. No-one can foretell what products will sell to what markets, at what prices or in what timescale. In many cases, the market might simply deliver existing products by other means, for example, providing access to film in video format via telecommunications rather than through the local video rental outlet. Prices would need to be set competitively, taking into account any premium for more attractive delivery. And for any given service, a proportion of revenues will go to the content creator or service provider rather than to the network owner.
5.3.2 The cost and price of conveying such services via telecommunication systems is a key element in the context of the issues covered by this Document. The prices charged to both end-users and other service providers using the network would need to reflect conveyance costs, including both the cost of new equipment, the systems necessary to distribute BSM services, and the common cost of existing infrastructure, shared with traditional services. This is a complex issue.
5.3.3 Whatever methods are used to deliver telecommunication services to customers (direct delivery by satellite, delivery by terrestrial radio or by fixed-link wire system), conveyance costs will affect the overall service price and therefore the viability of the service itself. If BT were to price the conveyance of its planned switched broadband service at or above traditional telephony rates for interconnection (ie fully allocated costs), for example, this could seriously harm the viability of such a service. It may be inappropriate to price a new service at fully allocated costs and a more acceptable approach would see prices set with reference to incremental costs, including a contribution to joint and common costs where this would not undermine the viability of the service.
5.3.4 The Statement published by Oftel on 25 July, Effective Competition: Framework for Action, discussed proposals for a move to incremental costs as the basis for interconnection charges. One factor that led to our endorsing this option was the likely advent of new services, such as those discussed in this Document, that would require greater bandwidth than that used by conventional voice telephony. In addition, economic theory supports the view that new applications for existing networks should be encouraged so long as they recover the incremental costs involved. As broadband switched services can largely be considered "new", this might justify low conveyance prices if this is the only way they can become viable.
5.3.5 Against this background, the provisional conclusion we have reached in that we should allow dominant network owners to price conveyance for BSM services down to incremental costs, at the same time insisting that such rates were available for all those wanting to provide such service. A subsequent question is whether Oftel should oblige dominant operators to price at this level, where another service provider wants access to its network.
Types of conveyance
5.3.6 Actual conveyance costs will depend on the type of distribution network used. The three most likely types of conveyance are as follows:
Despite the differing costs attached to each type of conveyance the services they deliver to customers are likely to be broadly similar in nature. Customers might be willing to pay higher prices only for a higher quality service or more choice. From the customer's point of view, the fact that a network is more "advanced" is immaterial.
Special regulatory regime for pricing broadband switched services
5.3.7 While the future development of the market is far from certain, it is possible to predict ways in which pricing might develop. It seems likely that in practice, the costs of conveyance might not be transparent to the consumer but be bundled with the cost of the service. In some circumstances, service providers might be willing to bear the conveyance costs of more expensive, switched networks in return for the commercial advantage of allowing more consumers to access their services. This might apply to transaction-based services, for example, or advertisers. Customers will in any case be reluctant to pay for services they have traditionally received free-of-charge, such as access to shopping catalogues or banking facilities. It also seems possible that conveyance pricing might move away from time as the measurement