3.1 As the consultative document Pricing of Telecommunications Services from 1997 recognised, the telecommunications market is not a single market, but a series of complex and interrelated markets.
3.2 This document distinguishes between three main markets: network services, basic retail services and enhanced services. These are defined in paragraphs 1.9 to 1.14 (in Chapter 1) above. This chapter deals with competition in these markets and the current regulation applying to them.
3.3 As paragraph 1.9 set out, network services can only be provided economically by network operators and are necessary inputs to both basic retail services and enhanced services. Network operators provide such services to themselves as an essential element in their services to end users, to other network operators and to independent service providers. The terms and conditions on which network services are provided to each category of customer are therefore vitally important.
3.4 BT's network is the most comprehensive in the UK. It has an unparalleled degree of coverage. Although other network operators such as Mercury, Energis, Scottish Telecom and the cable companies are constructing their own competing networks, Oftel's view is that, at present, the market in network services is not yet competitive. BT has, for example, 94% of all residential exchange lines (by number) in the UK.
3.5 BT also remains dominant in basic retail services. In 1994/5 BT's market share in the UK (by revenue) for simple voice telephony ranged from 94% for local calls to 70% for outgoing international calls. BT also has significant market power in services which cannot easily be separated from the underlying network services eg call diversion, call waiting, caller display, call return and "ring back when free".
3.6 Market share statistics tend to amalgamate enhanced services with some elements of what this document has defined as basic retail services. Whatever the exact definitions, the position in this market is more competitive. BT's overall market share comprises approximately 50% of a market worth about £1 billion, with competition coming from other network operators including Mercury and AT&T and from data service providers such as IBM.
3.7 The term enhanced services embraces a very wide range of services. It is possible to distinguish three broad categories: voice-based services, data-based services, and video-based services. Voice-based services generate revenues of about £400 million per annum in the UK while for data services the figure is of the order of £600 million per annum. The market for video-based services is currently relatively small. Historically, voice-based, data-based and video-based services have generally been provided over separate networks.
3.8 In recent years there has been some convergence in these markets, for example with the introduction of the Integrated Services Digital Network (ISDN). Oftel expects this trend to continue, with the emergence of technologies such as Asynchronous Transfer Mode (ATM)and the convergence of information technology (IT), telecommunications and broadcasting. As well as growth in these markets, there is likely to be a continued shift away from services solely or primarily involving conveyance of voice or data across the network to services involving a significant enhanced function.
3.9 The market for voice-based enhanced services, particularly those delivered over the Public Switched Telecommunications Network (PSTN), has reflected the position in basic retail services. BT has around 90% market share, with Mercury earning most of the remaining revenues. These voice based services include:
(a) Number translation services
3.10 Where calls are made to "special" numbers such as Freephone (eg 0800, 0500) Part Paid (eg 0345, 0645) and National Rate (eg 0990), the number must be translated into its "real" number in order to convey the call to the correct destination. In addition, arrangements are needed to charge the appropriate amount to the calling and called parties depending on the type of special number dialled.
(b) Premium Rate Services (PRS)
3.11 These are accessed using premium rate numbers (eg with an 0891 prefix). These are usually telephony-based information and entertainment services provided over a telecommunication network. They rely on number translation services (see (a) above). A large market for independent PRS providers has emerged in the UK, currently worth around £250 million a year, equivalent to about a third of the total European PRS market. PRS providers are diverse ranging from large marketing companies who may subcontract with third parties to obtain content, down to small businesses who provide the information or entertainment service directly themselves. Sport and tele-voting services currently generate the greatest volumes of traffic, but growth areas include professional advice services, helplines and other information services.
(c) Calling card services
3.12 These enable a caller to make a call from almost any telephone to any other but is charged to a separate account (eg the caller's home or office number or a credit card account). In the UK this market is dominated by BT and Mercury, but other network operators are entering.
(d) Personal numbering
3.13 This enables the user to be called using a single "personal" telephone number but to receive calls at almost any telephone number in the UK. Companies providing personal numbering services include Flextel, Redstone and Personal Numbering Company. Both personal numbering and calling card services (see (c) above) provide elements of mobility on the fixed network and are widely predicted to evolve into groups of services designed to provide converged fixed and mobile services;
(e) Voice messaging services
3.14 Using these services customers can exchange voice messages via "mail boxes" or generally leave messages. Voice mail is an example.
(f) Managed network services
3.15 Some forms of managed network services are included such as Centrex and Virtual Private Networks (VPNs) which enable an organisation to create a telecommunication network for its own exclusive use, possibly linking several widely-dispersed sites.
3.16 The market in data-based enhanced services is far more competitive and de-regulated. BT has approximately 20% of this market. Other service providers with significant market share include Mercury, Racal Network Services, AT&T and IBM. BT has a significant presence in areas such as the provision of managed networks, Electronic Data Interchange (EDI) and electronic mail. However, it has little or no market share in other niche markets, for example computerised reservation systems. Examples of such data services are:
(a) On-line information
3.17 These services give access to stored information which can be transmitted over the telecommunication network. Examples of companies in this sector are Reuters, FT Profile, CompuServe, UK-On-line and Microsoft Network. On-line information services are increasingly being packaged together with Internet access by service providers such as CompuServe. BT provides on-line directory information through for example electronic yellow pages and its Phonebase service.
(b) Electronic mail (E-mail)
3.18 This is a text messaging service which allows customers to exchange text messages or data files using a discrete network or via the Internet.
(c) Electronic Data Interchange (EDI)
3.19 This usually involves the setting up of a community of users to speed up and improve communications between them (eg between supermarkets and their suppliers, or between manufacturers and retail outlets or repair shops). A recent, very large EDI network is that supporting the National Lottery serving 10,000 retailers across the country.
(d) Other data transaction services
3.20 These include holiday and airline ticket booking systems and electronic funds transfer at point of sale (EFTPOS) which facilitates credit and debit card transactions.
(e) Internet access
3.21 The Internet has obviously experienced phenomenal growth and it is not clear how it will develop. It has some scope for becoming a multi-service network capable of the delivery of many media forms - text, data, voice-audio and still or moving pictures - but this will require adequate bandwidth to continue to be made available and higher bandwidth access methods. There are currently over a hundred Internet service providers in the UK and the number is growing monthly.
(f) Alarm transmission and telemetry
3.22 Alarm transmission enables remote control of transmission of alarms to alarm management centres and telemetry enables remote reading of, for example, electricity meters, over the ordinary telephone line provided by the network operator. A key characteristic of these services is the inherent advantage which the existing provider of the local telephony network currently enjoys in their provision.
3.23 In the video-based sector there has been significant growth in the availability of video telephony, video conferencing, business TV and satellite TV up-linking and distribution. Business needs will be a major driver here. Another important element is the growing availability of residential TV distribution via the cable companies and direct-to-home satellite. In the next few years these should be joined by the new digital terrestial TV systems. In addition, developments in the video sector will lead to greater demand for other services, for example video-compression (as a result of digitalisation) and conditional access and subscriber management systems (as pay television grows).
3.24 As paragraph 1.13 pointed out, most enhanced services are readily capable of being provided by independent service providers. Services that are not, such as caller display and call waiting, are being provided by capabilities so embedded in the network that the independent provision of the service would not be economic. For these services, Oftel would expect that effective competition will only be possible between network operators. For the enhanced services described above, competition between service providers (both independent service providers and network operators providing services) is possible, economic and desirable. Independent service providers get access to the end-to-end network services which are a vital input to their enhanced services in the form of basic retail services. If competition is to flourish in the enhanced services market, the terms and conditions on which independent service providers have access to basic retail services is therefore vitally important.
3.25 Paragraphs 3.4 to 3.22 above demonstrate that BT has a significant market share in the network connection and basic retail services market and is also a significant player in the enhanced services market. Given that basic retail services (including end-to-end network services) are key inputs to the enhanced services market, the regulatory concern is that BT should not abuse its power in these markets to distort competition in the enhanced services market.
3.26 In view of its market position, the regulatory controls will inevitably apply more directly to BT than to other network operators.
3.27 The existing key controls on BT as a service provider are the requirements on accounting separation, the prohibitions on undue discrimination and unfair cross subsidy and the obligation to give network operators Condition 13 charges. These controls are as follows:
3.28 These controls mean that BT:
3.29 Other network operators are also required to provide BT (and other network operators) with network services. In general, however, other network operators are not subject to price controls on their retail prices, and the provisions in their licences on accounting separation, undue discrimination or unfair cross subsidy are less applicable compared to BT because they do not have a dominant position in the market for network, basic retail or enhanced services. They therefore have more freedom to set prices although, in practice, BT's prices set significant limits on this pricing freedom.
3.30 Oftel is concerned to ensure that any dominant operator does not abuse such dominance to distort competition in the telecommunications market. In principle, therefore, many of the regulatory controls currently applying to BT should also be applicable to other operators with a dominant market position.
3.31 Although this document is concerned with the fixed telecommunications market, some reference to the regulatory controls in the mobile market and the convergence of the fixed and mobile markets in telecommunication services is relevant.
3.32 The current regulatory regime for mobile network operators obliges them to provide mobile services to service providers for resale and relies on conditions in the mobile operators' licences to ensure that a mobile network operator cannot discriminate between an independent service provider and the network operator's tied service provider or direct business. These conditions include a prohibition on undue preference and undue discrimination, a prohibition on unfair cross subsidies, and requirements concerning accounting separation and publication of tariffs.
3.33 Both Cellnet and Vodafone sell close to 100% of their mobile services through service providers who are charged by the mobile operators for airtime, including any airtime used for the conveyance element of the provision of mobile messaging services at a recommended retail price less a discount. This discount increases with the size and growth of the subscriber base and is of the order of 20-25%.
3.34 As the demand for mobile services grows, operators and service providers are likely to seek to offer their customers converged fixed and mobile services (ultimately perhaps over an integrated network). As a result, the fixed and mobile markets are likely to converge. Regulation of service providers in the mobile and fixed markets is currently distinct. As the two markets converge this will need to be addressed.
3.35 Oftel believes that independent service providers have an important role to play in providing competition which will help stimulate growth, innovation and customer choice. It also believes that in the enhanced services market, there is potential for competition from both network operators and independent service providers. The price of end-to-end network services for independent service providers will be a vital factor in ensuring fair competition. At the moment (although not necessarily in the long term), BT is dominant in the market for network and basic retail services and has significant market power in the market for enhanced services. Oftel is therefore concerned that BT - or any dominant operator in the network market - cannot abuse its position in that market to give it an unfair advantage in the enhanced services market.
3.36 The regulatory controls on BT already recognise BT's market position in the network, basic retail and enhanced services markets and seek to deal with this through Condition 13 charges and accounting separation arrangements and by ensuring that BT charges itself retail prices for basic retail services which are an input to its SSB activities. If the market for enhanced services is to be competitive, the question of which of BT's activities fall within the SSB and which fall within the SB is a crucial regulatory issue. This is dealt with in Chapter 6.