|
|
|
|
|
|
|
|
|
|
|
|
 |
 |
 |
|
||||
| Digital television and interactive services | |
||||||
 |
 |
 |
|
||||
 |
|
|
|
 |
|
||
|
|
|
|||||
|
Ensuring access on fair, reasonable and non-discriminatory terms A statement issued by the Director General of Telecommunications Introduction and purpose of Statement Summary of Consolidated Guidelines Statement: Digital television and interactive services The boundary between conditional access and access control services Recovering subsidy from charges for access control and conditional access services Recovering subsidy for fulfilling multiplex licence obligations Subsidy to consumer equipment manufacturers Benefits of contractual tie-ins Pay-per-view and subscription television The pricing of conditional access and access control services - Oftel Guidelines Introduction and purpose of Statement This statement provides Oftel's views on the main issues arising out of the consultation on Digital television and interactive services: ensuring access on fair, reasonable and non-discriminatory terms (Consultation document issued March 1998). Consultees generally agreed that Oftel's approach for regulating the charges for conditional access services for digital television should be extended to cover access control services as well. Therefore Oftel has published consolidated guidelines for regulating charges for both conditional access and access control services (attached to this Statement). These consolidated guidelines replace the previous guidelines (Conditional access charges for digital television services: Oftel Guidelines – February 1998). Summary of Consolidated Guidelines Conditional access services are telecommunication services which control end-user’s access to television services. Access control services are telecommunication services (other than conditional access services) which control the supply of other digital telecommunication services to end-users. Conditional access operators (apart from those who supply only to themselves) and Regulated Suppliers (see paragraph 12) of access control services must ensure that charges to third parties for conditional access and access control services are set on a fair, reasonable and non-discriminatory basis. When considering what is meant by the phrase ‘fair, reasonable and non-discriminatory basis’, Oftel will apply the following general principles:
Oftel’s guidelines ensure that conditional access and access control operators:
The Consolidated Guidelines apply to all suppliers of conditional access services, except for those who supply only to themselves. In relation to access control services, the Guidelines only apply when a Regulated Supplier Notice has been issued.
A statement issued by the Director General of Telecommunications The boundary between conditional access and access control services 1. There are close linkages between conditional access services and access control services. Conditional access services are a subset of access control services. Both are means to control:
2. The obligations to supply conditional access services derive from a European Union directive (the Advanced Television Standards Directive 95/47/EC – ‘the Directive’). The Directive applies to anyone who produces and markets technical conditional access services for digital television. The Directive only applies to digital television services. However, the term ‘television service’ is left undefined. While ultimately it is for the European Court to decide on the definition of this term, the guidelines offer practical guidance on the boundaries of the two services. 3. The obligations to supply access control services derive from conditions in licences granted under the Telecommunications Act 1984. The access control obligations only apply to those operators in respect of which the Director General has issued a ‘Regulated Supplier Notice.’ 4. Oftel considers that, in general, conditional access services include:
5. Oftel considers that, in general, access control services include:
Triggering access control 6. Oftel is currently preparing separate guidelines for consultation on when the Director General should issue a Regulated Supplier Notice, which triggers the access control obligations in the Telecommunications Services Licence. Recovering subsidy from charges for access control and conditional access services 7. Consumers can buy a set top box at a reduced price if it is subsidised (generally by the conditional access operator). The guidelines only apply to subsidy recovered through conditional access (or access control charges, but only when the access control obligations are triggered). Subsidy through an open system is not covered. An example of an open system subsidy is where service providers give a subsidy to manufacturers in return for placing the service provider’s icon on the ‘start up’ screen. 8. The consultation considered whether, and to what extent, the operator can recover the subsidy through its charges to service providers for access control and conditional access services. It is reasonable to regard a subsidy as a common cost, not attributable to any one service provider. Oftel considers that, in general, firms should be free to decide on how they should recover their common costs. Generally, market forces provide the most appropriate way to determine what proportion of subsidy is recovered from each type of service user. Intervention from Oftel to set the apportionment may be unnecessary and second guessing this assessment risks outcomes that are economically inefficient. Therefore the operator should decide what proportion of subsidy to recover from access control and conditional access services through its charges for these services. Oftel therefore proposed not to intervene on this issue, save in exceptional circumstances. 9. Oftel’s stance on that point gave rise to three potential concerns during consultation:
10. In relation to the first concern, if a particular apportionment of common costs makes it not viable to operate an access control business then market forces should encourage the operator to review the allocation of subsidy recovery. Oftel considers that the operator of an access control system is likely to encourage use of the system rather than discourage its use. 11. In relation to the second concern, the vertically integrated firm is required to set charges on a non-discriminatory basis. This means that the vertically integrated firm will face the same level of subsidy recovery as its rivals in downstream markets. 12. While it is relatively unlikely, the third concern may constitute grounds for intervention in the allocation of subsidy recovery between conditional access and access control services. 13. Of course, Oftel stands ready to intervene in any of these circumstances, in the light of evidence to the effect that the allocation of subsidy had a material adverse effect on competition in a relevant market. Recovering subsidy for fulfilling multiplex licence obligations 14. As part of the award of licences for digital terrestrial multiplexes under the Broadcasting Act 1996, successful firms were required to invest monies to market and subsidise consumer equipment to accelerate consumer take up of digital terrestrial television (DTT) services. Oftel has not formed a view whether these monies can be recovered from third party DTT broadcasters via conditional access charges, because the future commercial arrangements are still uncertain. (DTT broadcasters are still formulating their plans for future DTT services). Oftel will reconsider this issue in the future. 15. Oftel’s interim view is that payments made in fulfilling licence commitments should be treated as in lieu of payments for that licence and, therefore, are not recoverable from third party broadcasters. Before making a final decision the Director General will have regard, amongst other matters, to the legitimate expectations of the applicants for the digital terrestrial multiplex licences at the time the applications were prepared. 16. It should be made clear that:
Subsidy to consumer equipment manufacturers 17. Oftel considers that it is unlikely that subsidy providers would allocate subsidy between equipment manufacturers with the intent of restricting or distorting competition between them. Oftel recognises that there are legitimate commercial reasons why a subsidy provider would wish to support only a limited number of consumer equipment manufacturers. However, Oftel would consider complaints that refusal to provide subsidy, or the terms and conditions attached to subsidy, was intended to prevent, restrict or distort competition in a relevant market. Benefits of contractual tie-ins 18. Subsidy recovered via access charges to third party service providers should be reduced to reflect the value of consumer tie-in arrangements. A consumer tie-in arrangement involves the consumer agreeing to purchase other goods or services (such as signing up to a fixed term pay-TV subscription) to benefit from subsidised equipment (such as the set top box). This would also include de facto ties. For example, a broadcaster subsidiary of a conditional access provider which dominated the supply of pay-television services might require that consumers take its services for a minimum period, without being required to subscribe in order to purchase subsidised equipment. This has the same practical effect as a tie-in. The method for calculating the reduction of subsidy chargeable to third parties as a result of tie-ins is set out in Annex 1 to the Consolidated Guidelines. 19. Oftel will assess the cost of capital (for initial and subsequent tranches of investment in access control and conditional access services) on the basis of the level of risk prevailing at the time the investment is made. One key determinant of the level of risk is the operator's decision on the relative proportions of the subsidy recovered from access control and conditional access services respectively. 20. The level of risk would be higher if the operator's decision on the split for recovery could not be changed. If charges from interactive services do not recover the proportion of subsidy assigned to it (because the interactive services market fails to develop as expected), this amount would then effectively be written off. 21. However, Oftel considers it is possible to re-set the relative proportions of subsidy to be recovered from each type of service (for example, more can be recovered from conditional access services). Therefore the risk should be regarded as diversifiable over both television and interactive services. Oftel considers that any split for recovery can be changed, as parties can revise arrangements in the future. Pay-per-view and subscription television 22. One of Oftel's objectives in interpreting the fair reasonable and non-discriminatory requirements attached to pricing of conditional access services is to ensure that these pricing strategies do not have significant adverse effects on downstream markets. 23. Oftel has been asked whether it is reasonable for conditional access providers to set different charges for subscription television services and pay-per-view services. In examining if different prices to service providers are non-discriminatory, Oftel will apply the following general principles:
24. Although pay-per-view services are currently limited in scale and scope in the UK, it is feasible that some pay-per-view services might at some point compete effectively with some subscription services. Discrimination between a pay-per-view broadcaster and a subscription broadcaster offering similar content has the potential to distort competition between them. However, if there were other forms of differentiation between a pay-per-view and subscription operators (such as a niche broadcaster compared with a broadcaster operating on a significant scale and with a greater scope) such that the two services could be regarded as not being comparable in general, or not competing directly, it may well be that Oftel would not consider that different charges would result in a material adverse effect on competition.
The pricing of conditional access and access control services Oftel Guidelines May 1999 ContentsChapter 2 Assessment of whether costs, revenues and prices are fair and reasonable Chapter 3 Assessing whether prices are non-discriminatory Chapter 4 Risk-sharing arrangements and the recovery of fixed costs Annex 2 Generic assets – depreciation issues The Pricing of Conditional Access and Access Control Services: Oftel Guidelines Introduction Background 1.1 Oftel’s responsibilities in relation to the pricing of conditional access for digital television stem from the Advanced TV Services Regulations 1996 (SI 1996 No 3151) and the Class Licence for Conditional Access Services (‘the CA Class Licence’) issued under the Telecommunications Act 1984 on 7 January 1997. The Regulations place a duty on conditional access operators who produce and market access services to offer technical conditional access services on a ‘fair reasonable and non-discriminatory basis.’ This duty is mirrored in the CA Class Licence. 1.2 The Regulations and CA Class Licence implement the Advanced Television Standards Directive (95/47/EC)(‘the Directive’) in the UK. The provisions of the Directive cover the supply of technical conditional access services for ‘digital’ television services’. The major provision is a requirement that such services should be provided to ‘broadcasters’ on a fair reasonable and non-discriminatory basis. The Directive leaves the terms ‘broadcaster’ and ‘television services’ undefined. The UK Government announced in November 1996 that it would bring forward proposals to ensure that all access control services would be covered by the regulatory framework. This policy began to be implemented in the proposals for the modification of the Telecommunications Services Licence which came into effect on 31 December 1997. 1.3 Access control services are telecommunication services (other than conditional access services) which control the supply of other digital telecommunication services to end-users. The Telecommunications Services Licence (from the scope of which access to digital television services is excluded) requires Regulated Suppliers of access control services to offer those services on fair, reasonable and non-discriminatory terms. This reflects the principal obligations in the conditional access class licence. Taken together, the two licences ensure a unified regime for regulating access for television and interactive services delivered via broadcasting and point-to-point telecommunications systems. 1.4 The conditions in the Telecommunications Services Licence apply only to those suppliers who have been notified that they are Regulated Suppliers. This is intended to ensure that the scope of regulation is not extended unnecessarily while putting in place a framework to enable swift and direct action if competition problems emerge, or are likely to emerge in relation to gateway systems. The access control requirements will only be triggered if alternative supply of access control services could only be obtained at an uneconomic cost either to the service provider requiring access control, or to the end-user receiving the services to which access is controlled. 1.5 The Guidelines on the conditional access charges for digital television (Annex A to the Oftel Statement Conditional access charges for digital television published in February 1998) have been consolidated into these guidelines which replace them. Status 1.6 These guidelines represent Oftel’s current view of the way it would interpret its responsibilities and exercise its discretion under current legislation. Oftel will keep them under review in the light of market developments and further information, and may issue a revised version if it is necessary to do so. 1.7 These guidelines do not form part of either licence or the Regulations, and they do not affect their legal scope. The Director General will take the guidelines into account in applying the Licence and in his role in relation to the Regulations. He would normally expect to follow them and to give his reasons if he departed from them. The Director General cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the guidelines where the circumstances warrant it. The guidelines are therefore not binding on the Director General and will be reviewed from time to time as the market develops and new information emerges. Scope of the guidelines Access control and conditional access 1.8 These guidelines cover the pricing of:
1.9 Technical conditional access services are telecommunication services which control viewer’s-access to digital television services. For ease of reference the term conditional access services is used throughout this document. Unless otherwise stated this term should be taken to mean technical conditional access services. 1.10 The regulatory regime for conditional access derives from a European Union directive while the regime for access control derives from the Telecommunications Act 1984. There are therefore some differences between the regulatory regimes covering the two types of service. The following paragraphs seek to give practical guidance on Oftel’s view of the distinction between the two types of service. It should be noted, however, that because the conditional access regime implements a European Union directive the final decision on the scope of the regime would lie with the European Court. 1.11 Conditional access and access control services are both means by which access to value-added services such as content by viewers is controlled, as well as controlling access by service providers to viewers/end users. Conditional access services are therefore a logical subset of access control services. Because of the close linkages between the technologies the boundary line between the two may prove difficult to draw in practice. 1.12 As general guidance, Oftel would take the view that conditional access services included those services need to control the supply of television services to viewers. This includes:
1.13 The DTI and Oftel have taken the view that because the regulatory requirements on conditional access apply to ‘technical services’ they do not apply to customer management services (ie the taking of subscribers’ orders and processing of subscriptions). 1.14 Access control services are services used to control the supply of other digital services to customers. This includes:
1.15 The Regulations and the CA Class Licence give rights to ‘broadcasters’ in relation to conditional access services for controlling the supply of ‘television services’. Both terms are left undefined in the Directive and the Regulations. The interpretation of these terms should not therefore necessarily be taken as being limited to traditional television services and broadcasters. 1.16 These guidelines use the term ‘service provider’ to apply to both broadcasters and other (eg interactive) service providers. 1.17 These guidelines do not cover the terms for carriage of programme data and listing within Electronic Programme Guides (EPGs) and other associated issues. Approach to regulation 1.18 The conditional access Class Licence and the access control provisions of the Telecommunications Services Licence have been framed in terms which enable Oftel to intervene in firms’ pricing only in the event that commercial negotiations fail to arrive at an outcome which is fair, reasonable and non-discriminatory. Oftel’s view is that more direct constraint of prices would be unduly intrusive, as well as administratively burdensome, and it would not propose such an approach unless absolutely necessary. Oftel would consider such an approach necessary if commercial negotiations were unsuccessful in delivering fair, reasonable and non-discriminatory prices. 1.19 The purpose of these guidelines is to enable parties to negotiations to understand the principles which Oftel would apply if it received a complaint that the prices offered were not fair, reasonable and non-discriminatory. Oftel would normally only expect to make an assessment if it received a complaint. It should be noted that neither the Directive, the Regulations or the CA Class Licence preclude a broadcaster or service provider from making a complaint to Oftel about the prices charged under an existing agreement between it and the provider of access control or conditional access services. 1.20 The process Oftel would undertake to assess whether prices for conditional access or access control services are fair, reasonable and non-discriminatory has three main steps. 1.21 First, Oftel would consider the nature and level of the costs to be recovered from charges and the relationship between total costs and total expected revenues. 1.22 The second step would be to consider the pricing framework for particular types of service. In this part of the process Oftel would be primarily concerned to establish that there was no cross-subsidy between different categories of service. 1.23 The third step would be to examine the prices offered to individual users of access control or conditional access, or categories of users. In this part of the process Oftel would be concerned to establish that comparable users requiring comparable services were being offered comparable prices. 1.24 These steps are described in more detail in the remainder of this document. 1.25 In the event that the Director General took the view that the prices offered were not fair, reasonable and non-discriminatory, he would then take enforcement action under Section 16 of the Telecommunications Act 1984 to require the conditional access or access control operator to revise its prices in order to comply with the terms of the CA Class Licence. The Director General may grant a transitional period in respect of existing contracts to allow new arrangements to be put in place. Whether it is appropriate to grant a transitional period, and the length of such a period will depend on the significance of the adverse impact on competition of the existing arrangements. Assessment of whether costs, revenues and prices are fair and reasonable Allowable costs 2.1 The general principle Oftel would follow in assessing the costs to be recovered from conditional access or access control charges is that those costs should be properly related to the provision of those services. 2.2 The following sections discuss cost categories for which there is an issue about the extent to which they should be recoverable via conditional access or access control charges. Investment in acquiring generic conditional access skills 2.3 Oftel accepts that it would be appropriate to regard certain previously-incurred costs as an investment in the generic conditional access business and that the conditional access operator should be able, if it wishes, to recover a proportion of these costs from digital conditional access charges. 2.4 Only costs that are truly generic to conditional access should be recovered in this way. It would be neither appropriate nor acceptable to recover from digital conditional access charges costs that have been incurred in acquiring skills or equipment that are specific to analogue conditional access systems. 2.5 The conditional access operator would need to demonstrate that it had a proper methodology for establishing whether it was appropriate to regard particular costs as investments in generic skills. 2.6 These investments would also need to be subject to an appropriate method of depreciation. It may be that some assets acquired during the analogue phase of operations may have reached the end of their life. In such circumstances, it would not be appropriate to recover this proportion of generic costs again from conditional access for digital television. Depreciation issues are discussed in more detail in Annex 2. Marketing expenditure 2.7 Oftel accepts that it is, in principle, legitimate to recover marketing expenditure from conditional access and access control charges where it can be clearly demonstrated that the expenditure:
Investment in subsidy of consumer equipment 2.8 There are two issues which are relevant in considering what proportion of the total subsidy should be recoverable from third parties:
Contractual commitments by the consumer 2.9 Contractual agreements which the consumer must enter into in order to be able to purchase equipment at subsidised prices (‘tie-ins’) can provide a means by which the subsidy provider captures the benefit of the subsidy directly from consumers. The level of subsidy recoverable from third parties should be reduced by the extent of this benefit. This would also include de facto ties. For example, a broadcaster subsidiary of a conditional access provider which dominated the supply of pay television services might require that consumers take its services for a minimum period, without being required to subscribe in order to purchase subsidised equipment. This has the same practical effect as a tie-in. The issues concerning the valuation of the benefits of tie-ins are discussed in Annex 1. Effect on competition 2.10 Oftel reserves the right to disallow all or part of the subsidy when payment is subject to conditions that would have the effect of having a significant adverse effect on competition in a market. Such conditions could include a refusal to provide subsidy in respect of some equipment. However, Oftel recognises that there are legitimate commercial reasons for refusing to provide subsidy. Commitments required under digital terrestrial television licences 2.11 Measures to accelerate consumer take-up of digital terrestrial services are one of the criteria laid down by the Broadcasting Act 1996 for the award of the digital terrestrial multiplexes. This primarily involves marketing and subsidy of consumer equipment. 2.12 Oftel’s interim view is that it would not be appropriate that the cost of commitments made to secure digital terrestrial multiplex licences should be recoverable via conditional access or access control charges. Oftel would seek further representations on this issue in the event of it being asked to consider the proposed conditional access charges for digital television (or, if relevant, access control charges). This would include, in particular, whether those making bids for the digital terrestrial multiplex franchises could have legitimately expected to be able to recover subsidy committed under licence obligation from third parties. For the avoidance of doubt it should be clear that this does not apply to subsidy payments which are in addition to the payments made under licence commitments. The level of input costs 2.13 In assessing whether the final charges are fair and reasonable Oftel may need to consider whether input costs are appropriate. In particular, where the operator of a conditional access/ access control system purchases inputs, such as smart cards, from an associated company, the operator will need to demonstrate that the input costs are not excessive and that it has appropriate arrangements for the independent scrutiny of charges for services from related companies. Relationship between costs and expected revenues 2.14 Having assessed the nature and level of costs to be recovered from charges for services, Oftel would then consider the relationship between those costs and expected revenues. Oftel’s approach would be to consider whether the pricing framework was such that the provider of conditional access and access control services could be expected on average to make a return on its investment in them that was neither inadequate nor excessive, taking proper account of risk and uncertainty 2.15 Oftel’s approach would be to consider whether the pricing framework allowed the provider of conditional access and access control services to make a return on its investment in these services that was neither inadequate nor excessive. Such an evaluation would take into account the levels of risk and uncertainty applying to the investment in these services at the time it was made. 2.16 The latter point is of some importance. Oftel would not use the benefit of hindsight to review the pricing structure. The existence of high returns if the investment turned out to be more successful than expected at the time the investment was made would not necessarily be regarded as evidence that prices were too high. The operator would receive the benefit if its business turns out to be more successful than anticipated as well as bearing any losses if it turns out worse than expected. Cost of capital 2.17 Oftel would need to consider whether the expected rate of return used by the operator in calculating prices equalled the appropriate cost of capital. 2.18 The methods used by Oftel and other regulators for assessing the cost of capital take into account the riskiness of investment of the firm as compared with the stock market as a whole. This in turn is used to calculate the premium investors would require in comparison with a risk-free investment. (See Annex 2 for a more detailed technical discussion of these methodological issues). 2.19 In the case of conditional access and access control, however, there are additional risks that revenues may be either substantially above or substantially below the forecasts upon which investment decisions where made. Oftel recognises that it will be necessary to take into account the degree of risk that forecast out-turns may not be achieved. Oftel would take these into account in assessing whether the level of the projected cashflows were fair and reasonable having regard to probability of the investment succeeding or failing. 2.20 The level of uncertainty attached to investment in conditional access and access control systems is likely to fall over time. Particularly in the early stages of development high profits or significant losses may occur. Operators would expect to be compensated for bearing this uncertainty. However, as the market in services using conditional access or access control services becomes more established there is likely to be more certainty about future revenue streams. Later investments might, therefore, expect to earn lower returns. 2.21 The precise way in which uncertainty should be factored into prices would require further consideration, given the relatively subjective nature of risk assessment. Relationship between costs and prices 2.22 In assessing the relationship between costs and prices Oftel would be concerned to ensure that there was no cross-subsidy between different categories of service. The primary test of this is whether prices cover the incremental costs of providing a service – that is the costs incurred in providing a service that would not otherwise be incurred, were it not provided. Where there is more than one service using a common system there will be common costs shared between the services; in these cases there would be no cross-subsidy if the price were at least equal to the incremental cost and did not exceed the stand alone cost. The stand-alone cost of a service is the sum of common costs which span a service and its incremental costs. 2.23 The fact that common costs make up a considerable proportion of the total costs of conditional access/access control services does not mean that all users are equally responsible for costs. Different types of user require different types of service. Oftel would expect prices for services to be set between the ‘floor’ of incremental costs and ‘ceiling’ of stand alone cost of providing only these services. 2.24 This general rule also applies to the division of costs between access control and conditional access services. Oftel’s view is that subsidy of consumer equipment is a common cost between these services. The provider of these services should therefore, in general, be free to determine the extent to which this cost is recovered from each type of service. However, Oftel would intervene in the allocation of subsidy recovery between access control and conditional access services had a material adverse effect on a relevant market. Estimating incremental and stand alone costs 2.25 The level of the floors and ceilings will vary depending on the type of service and would reflect among other things:
2.26 This would mean for example that:
2.27 The prices for services to all categories of user would be expected to cover their costs. If there are common costs that are incurred by a sub-group of services then the prices for this group of services would have to cover these common costs. 2.28 Oftel recognises that in all these cases cost estimates will be approximate and subject to a degree of uncertainty. However the alternative would be a pricing structure which did not take account of differences in the level of sophistication of services required by different broadcasters. There would be a much greater risk that such a pricing structure did not meet the criteria of fair, reasonable or non-discriminatory. Relationship between conditional access prices, access control prices and retail prices 2.29 Oftel would be concerned if a vertically integrated provider of conditional access or access control services set charges in such a way as to squeeze the margins of rival service providers. This could have the effect of forcing rivals to exit the market or deterring them from entering it. 2.30 A margin squeeze would exist if the vertically integrated firm’s retail operation were not profitable if it was charged the same prices for conditional access or access control as were offered to third parties.
Assessing whether prices are non-discriminatory 3.1 Oftel recognises that the high fixed costs and low levels of activity-related costs may result in large differences between incremental and stand-alone costs. There would then be many sets of prices that would fall within this range. This means the interpretation of the requirement to charge on non-discriminatory terms will be of considerable importance. 3.2 Oftel’s approach to the interpretation of the ‘non-discriminatory’ requirement seeks to achieve the following objectives:
3.3 Oftel considers that these objectives are achieved by applying the following general principles:
3.4 If Oftel investigates a complaint that prices are discriminatory, it will have particular regard to whether:
3.5 However, this approach could potentially give rise to the possibility of pricing schemes with extreme variations in prices with some users being charged at incremental cost and others at stand alone cost. From the outset, Oftel does not wish to preclude charges for any particular user or group of user at or around incremental cost. In certain circumstances such charging arrangements may be economically efficient. Nevertheless, Oftel also recognises that concepts of equity and proportionality are implicit within the terms ‘fair, reasonable and non-discriminatory’ and these could be relevant if pricing schemes were to involve extreme disparities between different users or groups of users. Conditional access Discrimination between categories 3.6 To assess whether different service providers are comparable or not, Oftel would initially group service providers under three main categories:
3.7 If called upon to investigate particular prices Oftel’s initial presumption is that there would not be a material effect on competition if a conditional access provider offered different prices for the same or similar conditional access services to different categories of service providers. For example, it may offer different terms and conditions to free-to-air broadcasters from those offered to subscription broadcasters. Discrimination within categories 3.8 In assessing the prices offered to individual service providers within the same category, Oftel would seek to establish whether or not comparable terms and conditions are available to comparable broadcasters requiring the same or similar services. For avoidance of doubt, where broadcasters within the same category require different services Oftel expects that prices should reflect any differences in the cost of providing those services. 3.9 Oftel presumes that comparable terms and conditions offered to one broadcaster would be available to any other similarly situated broadcaster at broadly the same point in time. Otherwise, Oftel would consider that there are grounds for further investigation and would require the conditional access operator to justify the differences in terms and conditions. Discrimination between free-to-air broadcasters 3.10 Oftel’s general presumption would be that discrimination by suppliers of conditional access services in favour of public service broadcasters or channels simply by virtue of their public service remit, or in favour of licence-fee funded services as compared with advertising funded, would not be consistent with the non-discrimination requirement. However, this should not be taken as preventing the conditional access operator offering discounts where it could demonstrate that these reflected savings to it in the costs of providing those services. 3.11 Oftel’s presumption would also be that it would not be permissible to discriminate in favour of free-to-air television services which are already universally available (ie existing analogue terrestrial services) as opposed to those which were not (eg those available on direct-to-home satellite and cable but not analogue terrestrial). Existing universally available broadcasters already enjoy an advantage vis-a-vis other free-to-air broadcasters, and the use of this discriminant would further reinforce that advantage to the possible detriment of competition. Discrimination between pay-TV services 3.12 If Oftel were required to investigate prices offered to different pay-TV services it would initially presume that comparable pay-TV broadcasters should be offered comparable prices. However, consistent with the general principles, conditional access providers may discriminate between broadcasters if it is unlikely to have an adverse effect on competition between them. 3.13 Oftel would be particularly concerned by differences in prices that unduly favoured another part of the conditional access provider’s group against a competing pay television operator. 3.14 Some examples of the kind of differences between broadcasters which Oftel would be likely to view as indicating that they are not directly competing include differences in:
3.15 This list is not intended to be exhaustive. Oftel recognises that other characteristics may also justify differences in prices that do not have material adverse effects on competition in downstream markets. Discrimination between pay-per-view and subscription services 3.16 Oftel does not consider that the means of payment by consumers for content in itself provides sufficient grounds for discriminating between broadcasters. Although pay-per-view services are currently limited in scale and scope in the UK, it is feasible that some pay-per-view services might at some point compete effectively with some subscription services. Discrimination between a pay-per-view broadcaster and a subscription broadcaster offering similar content may therefore have the potential to distort competition between them. However, if there were other forms of differentiation between a pay-per-view and subscription operators (such as a niche broadcaster compared with a broadcaster operating on a significant scale), it is unlikely that Oftel would consider that different charges would result in a material adverse effect on competition. Discrimination between pay-per-view services 3.17 Oftel’s view is that it would be fair, reasonable and non-discriminatory for charges to pay-per-view broadcasters to distinguish between continuous and occasional broadcasters. (This should not be taken as precluding charging on a common basis, eg per-transaction charges). Access Control Services 3.18 Oftel would adopt the same principles with respect to the ability to discriminate between users of access control systems as set out above for conditional access. The key principles are that:
Risk-sharing arrangements and the recovery of fixed costs Risk sharing arrangements 4.1 There are two sets of risk factors that have the potential to impact on the revenues of providers of conditional access and access control services. The first set stems from the fact that the system costs are fixed but the number of subscribers is uncertain. The second set stems from the fact that, while the investment in consumer equipment is fixed, there is uncertainty as to how much the consumer will make use of the receiver. This is a particular uncertainty in relation to interactive services. In setting their prices the providers of conditional access or access control services will need to take a view on the likely numbers of subscribers and their use of interactive services in the relevant time period. They will also need to take a view on the extent to which they wish to bear these risks themselves or whether they would wish to share them with purchasers of access control or conditional access services. 4.2 Different pricing options and lengths of contract will involve differing allocations of risk between the service provider and the provider of conditional access or access control services. Oftel’s approach would be to interpret the criteria of ‘fair, reasonable and non-discriminatory’ in a way that permitted a mix of options to be offered. Oftel would expect the prices to reflect the relative level of risk. Where the provider of conditional access or access control services bore all of the risk Oftel would expect that it would be appropriately rewarded. Equally, where the provider of access control or conditional access services transferred some of that risk to a third party, Oftel would expect that transfer of risk to be reflected in the pricing. 4.3 One approach would be to share the fixed costs between service providers in a way that was independent of the number of subscribers – for example a flat fee or an agreed percentage of costs. 4.4 While such an approach might have advantages for some types of service provider, some service providers might prefer a fee related to the number of subscribers. The options include:
4.5 These options are not exclusive – a provider of conditional access or access control services might offer more than one option or some permutation of these approaches. 4.6 Different combinations of flat fees and per subscriber charges might also be possible. Options include:
4.7 Oftel would take a similar approach to different arrangements for handling the risk resulting from uncertainties over the level of usage of the system. These options would include basing the charge on forward estimates of the use of the system, to a retrospective adjustment of charges in the light of actual performance. 4.8 The general principle guiding Oftel’s approach would be that, provided the full set of offerings was available to all customers seeking conditional access or access control services at any given point in time, the provider of conditional access or access control services would be free to offer differentiated ‘fixed’ and ‘variable rate’ options. 4.9 Such arrangements might mean that some customers would be operating under different deals at any point in time. However, provided the provider of conditional access or access control services made available the same set of deals to all customers seeking to enter an agreement at any particular point in time, Oftel would be likely to take the view that the non-discrimination requirement had been fulfilled. 4.10 Given the uncertainty of forecasts, where the a provider of conditional access or access control services takes on most of this risk there is the possibility that it could make a large profit or make a loss on a ‘fixed rate’ deal. Such profits or losses should not be taken forward into future charges or spread across the charges made to other operators. They should be ‘ring fenced’, in keeping with the principle that a provider of conditional access or access control services would be bearing the risk. Recovery of fixed costs 4.11 Fixed system costs will be high in the early years of operation while the number of subscribers is likely to be relatively small. Oftel accepts that it would be legitimate in these circumstances for operators to adopt pricing strategies which avoid very high per subscriber prices in the early years as these could act as a deterrent to the introduction of new services and the development of the platform. This would also apply to ongoing ‘early entrant’ discounts offered to broadcasters prior to the launch of digital television services, or in their early years. However, Oftel considers that the extent and duration of such discounts should be commensurate with cost savings made by the conditional access or access control provider (for example through having a lower cost of capital). The conditional access or access control provider would need to be able to demonstrate this.
Other issues Interaction of licence conditions 5.1 Condition 1 of the CA Class Licence requires that the conditional access operator supplies technical conditional access services on fair, reasonable and non-discriminatory basis. The CA Class Licence also includes Condition 3 (Fair Trading) and Condition 6 (Prohibition on Undue Discrimination and Undue Preference). An established body of experience supports both of these conditions, and Oftel would normally expect to base its interpretation of the provisions of the CA Class Licence on established practice. However, it should be noted that Condition 1 directly reflects the words of the Directive and it is not open to Oftel to set limits on the interpretation of the Directive. Conditions 3 and 6 while providing established reference points are without prejudice to Condition 1. None of these conditions should be interpreted as placing limits upon the interpretation of the others. Fair Trading Condition 5.2 It should be noted that Oftel has published separate guidelines to the Fair Trading Condition (Condition 4 in the CA Class Licence and Condition 15 in the Telecommunications Services Licence). See Fair Trading Condition, Oftel Guidelines, March 1997. Publication of charges terms and conditions 5.3 The primary purpose of the licence condition on the publication of terms and conditions (Condition 7 of the CA Class Licence and Condition 22 of the Telecommunications Services Licence) is to ensure transparency in pricing and terms of conditions. This is so that service providers and other third parties are able to gain sufficient information to judge whether the terms and conditions being offered to them are non-discriminatory. The condition does not require a single rate card; it simply requires that the terms of all offers be published. The provider of conditional access or access control services may offer a rate card with more than one option – or, indeed, in the extreme, publish the terms and conditions of individual offers. 5.4 The publication of individual agreements should be at a sufficient level of detail to enable other service providers and third parties to make meaningful comparisons. It should contain a general description of the methodology used so that comparable service providers may make a reasonable estimate of the charges of the charges which they might incur. These details are likely to include:
Abatement of recoverable subsidy: Valuation of the benefit derived from conditions attached to the purchase of subsidised equipment The general principle proposed by Oftel is that where the consumer must agree to purchase other services in order to receive subsidised equipment (a ‘consumer tie-in’) the amount of the subsidy eligible for recovery via access charges to third parties should be reduced by the value of that tie-in to the party providing the subsidy. Oftel recognises that, in order to avoid double counting, it would be necessary to ensure that the calculation by which the value of the subsidy investment is depreciated took account of the abatement which had already taken place. Example: Twelve month contracts As an example we consider the position of a provider of conditional access which also supplies downstream services. It has a requirement that consumers sign up to its services for at least twelve months if they receive subsidised equipment. Applying the general principles above, the amount of subsidy recoverable from third party broadcasters would be reduced by the benefit gained by the supplier. This might be calculated by estimating:
The value of the benefit to the supplier of the combination of the subsidy and the contractual tie-in would then be the product of these three factors.
Generic assets – depreciation issues Assessing the life of generic assets and the appropriate method of depreciation to be adopted includes considering the mix of tangible and intangible assets. For conditional access systems, intangible assets may include the investment in acquiring the knowledge for developing conditional access systems, and tangible assets may include the conditional access equipment itself. If conditional access operators have been involved in the development of analogue conditional access systems from the start, then some assets may have reached the end of their life during the analogue phase. In such circumstances, it would not be appropriate to recover this proportion of generic costs again from the digital conditional access systems. The nature of conditional access systems suggest that it may be more appropriate to depreciate a greater proportion of generic assets in the early years (with relatively short live of the assets). For example, as the knowledge required to develop conditional access systems is disseminated, the value of that knowledge diminishes. It may not be sustainable within a competitive market environment to continue to recover the sunk costs of acquiring these intangible assets over a long period of time. While tangible generic assets of a conditional access system may tend to be more durable, they may still depreciate more at the start of their lives because of advances in technology. This would again suggest that the depreciation profile should be ‘front loaded’ with relatively high cost recovery in the early years. On the other hand, there are some reasons why it may be more appropriate to recover a greater proportion of generic costs in later years. In the early years the customer base from which the costs could be recovered would be quite small. This means that, if depreciation charges were calculated with no reference to sales volumes, the depreciation costs that each customer would have to bear would be relatively high in the early years. In later years, with a larger customer base, the costs per customer would be lower, although the total depreciation charge recovered over time would be the same. In order to avoid changes in unit costs over time, it may be more appropriate, therefore, to profile depreciation costs in line with expected volumes. The mix of generic assets with differing asset lives will complicate the choice of depreciation method. The perishable nature of some of the assets suggests that a depreciation methodology that allows a greater proportion of costs to be recovered in the early years may be appropriate. The effect of profiling, however, will tend to work in the opposite direction in that it points towards a depreciation method that recovers a greater proportion of costs in the later years. On balance, it might be appropriate, as well as simpler, to apply a straight-line depreciation method.
Cost of capital Introduction A firm's cost of capital can be defined as the rate of return that could be earned in the capital market on securities of equivalent risk. In general, the higher the riskiness of the firm's activities, the higher its cost of capital, since investors typically require compensation for greater risk. For a firm financed by debt and equity, the cost of capital will be a weighted average of its cost of capital from both sources. The following paragraphs describe the general techniques used to derive the cost of equity and debt. Cost of equity Two main methods are typically used to establish a firm's cost of equity. The most widely used model for estimating the equity cost of capital is the Capital Asset Pricing Model (CAPM). The basic premise of this model is that investors require a higher expected rate of return on any investment in order to compensate them for a higher risk of returns on that investment (as measured by the variability of those returns). Investors are assumed to be able to reduce risks by holding diversified portfolios of equities. However, there is a degree of systematic risk inherent in even the most diversified portfolio of shares, since the value of the whole stock market can rise or fall. This non-diversifiable risk cannot be eliminated by holding shares in a large number of companies, and is therefore a component of the cost of equity. The risk-free rate of return which investors would be able to earn with certainty is called the market risk premium. The additional return above the risk-free rate is that investors would require in order to compensate them for holding a share whose returns moved in line with those of the stock market as a whole. Returns on shares in some companies will fluctuate in step with, but more widely than, returns to the stock market as a whole. Returns on other types of shares will fluctuate in step with, but less widely than, the stock market as a whole. Others still could move against the market. The degree of correlation between returns on shares in one company and returns on the stock market as a whole can be estimated using dividend and share price data and is captured in a coefficient known as the company's Beta. A company showing higher than average non-diversifiable risk will have a Beta coefficient in excess of one, while a company showing lower than average non-diversifiable risk will have a Beta less than one. The cost of equity to the firm can then be calculated according to the basic CAPM formula below: Re = Rf + Beta.[E(Rm) – Rf], where Re is the cost of equity finance, Rf is the risk-free rate of return, Beta is the degree of correlation between returns on the company's shares and returns on the stock market as a whole, E(Rm) is the expected return on the market and E(Rm) – Rf is the expected market risk premium or excess return to equities. This calculation can be done in real or nominal terms. The two should have identical implications for measuring the financial performance of the enterprise, provided that the inflation rate assumed in the financial forecasts is the same as that implied by the difference between the estimated real and nominal cost of capital. One criticism often levelled at the CAPM is that the calculation of the equity premium is based on historic excess returns on equities rather than the returns that investors expected to achieve. Since investors base their decisions today on expectations of returns and their variability in the future, it would appear preferable to look at expectations directly. This is particularly important in the light of evidence that suggests that the risk premium varies over time, so that estimates of historic excess returns may not be a reliable guide to excess returns required in the near future. Cost of debt In the absence of specific information on the interest rates being paid by the firm in question, the pre-tax cost of debt is typically calculated by adding a small corporate risk premium to an estimate of the risk-free rate of return, as proxied by the return on government debt used in the conditional CAPM calculation. Specific risk In the case of start up ventures, which might be the nature of businesses such as the supply of conditional access or access control services, there is a need to ensure that specific risks are reflected in the Beta coefficient. These risks must be taken into account in assessing whether the level of the projected cashflows were fair and reasonable having regard to probability of the investment succeeding or failing. For example, if a group of investors were investing in a series of projects of which they estimated that a given proportion would be failures, then the successful projects would need to earn sufficient revenues not only to cover their own costs but also to cover the costs of the failures. Examples of such projects would include oil exploration and film production where it is usually expected that some projects will fail. Strictly speaking the approach Oftel proposes is not to adjust the cost of capital derived from the CAPM methodology, but instead to calculate the expected revenues which would result in the project representing a ‘fair bet’ for investors. A ‘fair bet’ is one where, if the bet were repeated a sufficient number of times the gamblers would get their stake back. For example, suppose that a bet was offered on the toss of a £1 coin. If successful players would make £2 and if unsuccessful players lost their stake. This would give a return of 100% to the successful player. A return of 100% might in isolation seem very attractive, but the 50% probability of losing the investment altogether must be taken into account. The expected outcome of this bet, if played out a number of times, would be for players to end up with their stake money and no more – that is, no return would be made, even though a return of 100% was possible on any individual bet. In the context of project investment, the notion of a ‘fair bet’ would be that, averaged over a number of projects, investors would cover their costs including the cost of capital. High returns might be made in some outcomes, but the expected value of cashflows – after factoring in all possible outcomes, with their associated probabilities – would result in returns equal to the cost of capital.
Access control services. Telecommunication services (other than conditional access services) which control the supply of other digital services (eg interactive services) to end-users. Like conditional access services, they are mechanisms through which access to the receiver is controlled and charges for use of the system can be levied. Control of access to the receiver is effected firstly on end-user’s access to content services, and secondly on service providers’ access to end-users. Examples include services for authenticating identity, and services for encrypting and decrypting digital services that are only intended to be available to authorised end-users. Application Programme Interface (API) Software in the receiver which interprets a set of commands telling it, for instance, where to display a graphic or other object on the screen. The API also allows the same applications to run on different receiver designs without the need for the application to be rewritten for each one. Beta The coefficient which measures the degree of correlation between the returns on shares in a particular company and returns on the stock market as a whole. In the Capital Asset Pricing Model, the higher a firm’s Beta, the greater the systematic riskiness of an investment in that firm’s shares (a Beta coefficient of one implying that the firm is of average risk). Common costs Costs that are incurred in the supply of all or a group of services provided by the firm and cannot be directly attributed to any one service. Conditional access services In the context of the Advanced Television Standards Directive (95/47/EC) as implemented in the UK, are telecommunication services which control end-user’s access to digital television services to only those viewers who are authorised to receive them. They include services for encryption and scrambling of digital television broadcasts, subscriber authorisation services and subscriber management services. They are also a means to restrict television broadcaster’s access to end-users. Cost of capital A firm’s cost of capital can be defined as the rate of return that could be earned in the capital market on securities of equivalent risk. In general, the higher the riskiness of the firm’s activities, the higher its cost of capital, since investors typically require compensation for greater risk. For a firm financed by debt and equity, the cost of capital will be a weighted average of its cost of capital from both source. DGIV This acronym is short for Directorate General IV of the European Commission which is responsible for enforcing the competition provisions of the Treaty of Rome. Electronic Programme Guide (EPG) Software in the receiver which takes data on programmes and displays these in the form of an on-screen guide. the guide displays information about what is on now and next on each channel as well as future programmes. Viewers may also be able to use the on-screen menus to order pay per-vie services or to access interactive services. Enhanced television services Television services which include interactive applications as well as audio and video. The term is used in this document to distinguish these services from basic television services ie sound, picture and text. Free-to-air television service A television service which can be received in a given area without charge to the viewer. Some free-to-air services may be broadcast in scrambled form in order to limit access to viewers in a specific geographic area. Other free-to-air services may be broadcast in the clear – ie unscrambled. Incremental costs The costs that arise as a result of the provision of the ‘increment’. So long as revenue exceeds incremental costs, the firm improves its profitability by providing the increment. Interactive services This term covers two forms of interactivity. The first is where viewers use the remote control to click to applications which are included in the broadcast stream. The second form of interactivity is where the modem is used to communicate with a remote server. In-the-clear television service Television services that are broadcast without scrambling and are thus accessible by all viewers within the reception area who have the necessary equipment. In-the-clear services are a sub-set of free-to-air services. Pay-per-view television service A television service where the viewer pays to watch a specific event (eg a sporting event, or film). Existing pay-per-view systems require the viewer to ring a customer management centre; impulse pay-per-view systems will enable viewers to purchase the right to see an event using an on-screen menu and their remote control and be authorised immediately. Stand-alone costs The costs to a firm of providing a service if it produces only that service and no other. Subscription television service A television service which is purchased by subscription (as opposed to pay-per-view or free-to-air). Subscription television services are usually classified into a basic tier of general news and entertainment channels and premium services (sports and films). System The computers and associated software and software interfaces which provide the facilities and arrangements for enabling transactions etc. System operator The organisation which has overall responsibility for managing the system and in particular for its security. Wholesale service provider The organisation which provides the computer servers needed for the playout of video and data and the reception and processing of responses from consumers via modem. The wholesale service provider might also provide other services to retailers and retail service providers such as design and writing applications. Wholesale interactive services The ability to offer retail goods and services to the end customer rather than the goods or services themselves.
|
|
||||||
|
|
||||||
 |
 |
|
|||||
 |
|
||||||
