12 November 1999

Contents

Summary

Chapter 1 - the Supply of Access Control services

Chapter 2 - Assessment of Market Power of SSSL

Chapter 3 - Forebearance

Annex

Consultation

Summary

All suppliers of Access Control Services operate under the Class Licence for the Running of Telecommunications Systems for the Provision of Access Control Services, granted by the Secretary of State under Section 7 of the Telecommunications Act 1984, issued on 31 August 1999 (‘the Licence’). However, a number of conditions within the Licence apply only to those suppliers of Access Control Services that are determined by the Director to be ‘Regulated Suppliers’. These conditions are discussed in detail in Oftel’s Draft guidelines on Regulated Supplier determinations, issued in July 1999 and The pricing of Conditional Access and Access Control Services, issued in May 1999.

This document considers whether the Director should determine Sky Subscribers Services Limited (‘SSSL’), which is the Licensee in this instance, to be a Regulated Supplier and concludes that he should.

This document represents a ‘notice’ for the purposes of paragraph 6(a) of Part 1 of Schedule 1 of the Licence and the publication of this notice commences the initial period of 28 days in which the licensee and interested parties can make representations. The closing date for representations from the licensee and interested parties is 10 December 1999. Following this initial 28 day consultation, all non-confidential representations will be published and the licensee and interested parties will have a further 28 days to make observations on the representations. The Director will then prepare a draft decision and statement and send it to the licensee and interested parties that have responded to the consultations. The Director will consider any comments received and inform the licensee of his decision. See paragraph 6 of Part 1 of Schedule 1 of the Licence for further detail on this procedure.

1. The supply of Access Control Services

1.1 Condition 9 of the Licence (‘the trigger’) sets out the provisions the Director must take into account when considering a Regulated Supplier determination. This section considers whether the provisions set out in Condition 9.2 (a) to (c) are satisfied, as required by Condition 9.8(iii). It also describes the Access Control Services which the Director considers are, or may be, supplied and the Relevant Other Telecommunications Service in respect of which such Access Control Services are, or may be, supplied as required by Conditions 9.8(i) and (ii) of the Licence.

1.2 Condition 9.2(a) requires that the licensee supplies or intends to supply Access Control Services to another person. The Director is of the opinion that SSSL is currently supplying Access Control Services to Open and to British Sky Broadcasting Limited (BSkyB) in connection with the digital interactive TV services provided by Open and BSkyB. The services that the Director considers to be Access Control Services for the purposes of Condition 9.2(a) are described further in paragraph 2.7.

1.3 Condition 9.2(b) requires that a third party supplies or intends to supply to the public a Relevant Other Telecommunications Service in respect of which the use of Access Control Services is necessary. The Director is of the opinion that digital interactive TV services supplied by Open and BSkyB are Relevant Other Telecommunications Services as defined in the Licence.

1.4 Condition 9.2(c) requires that a third party has made a reasonable request for the provision of Access Control Services. As SSSL has agreed to supply Access Control Services to Open and BSkyB it is assumed that such a request has been made.

2. Assessment of market power of SSSL

2.1 Condition 9 requires the Director to find that the Licensee is in a position of market influence (Condition 9.2) or a dominant position (Condition 9.5) in the relevant market within which Access Control Services fall. The analysis in this section uses the methodology set out in the Draft guidelines on Regulated Supplier determinations, issued by Oftel in July 1999. First, the relevant market is defined. Then, the proposed methodology for determining the extent of market power held by an operator is applied to SSSL.

Market definition

2.2 In making a Regulated Supplier determination the Director is required to have regard to any relevant decision or statement of the European Commission. The European Commission has considered the issue of the relevant economic market in relation to the services supplied by SSSL in its decision on Application for negative clearance or an individual decision to grant an exemption pursuant to Article 85(3) of the EC Treaty (Case No IV/36.539 – British Interactive Broadcasting [BiB] OJE, 98/C 322/05) published on 21 October 1998.

2.3 The Director considers that the European Commission’s view of the relevant markets presents a useful starting point in the analysis of the current case and that the facts on which the Commission based its analysis continue to be valid.

2.4 In the BiB case the European Commission determined that there is a separate economic market for digital interactive TV services in the UK. The Commission decided that this market consists of the provision to consumers of a package of interactive services including, for example, retailing, financial services information, education, Internet access, e-mail and games. The Commission noted that this market definition may change over time and made reference to the possibility that Internet access via television sets may impact on the market definition.

2.5 At present, interactive services are delivered over four types of digital TV delivery platform in the UK: satellite, cable, terrestrial and via upgraded telephone networks. Digital interactive TV services are at an early stage of development due to both the relatively recent commencement of digital TV broadcasting in the UK and because cable companies are still in the process of developing their digital services and upgrading their networks to enable these to be provided. Annex 1 provides a description of the current and announced plans for digital interactive TV services in the UK.

2.6 The present determination is concerned with the provision of Access Control Services. These are technical services that enable only authorised digital interactive TV services to be accessed by end users. The operators of digital broadcasting platforms supply these technical services to digital interactive TV service providers. They are used for two main reasons:

• to enable service providers to charge for use of digital interactive TV services or charge for goods and services delivered via TV shopping; and
• to enable platform operators to protect the security and integrity of their network.

2.7 The technical services that are supplied to a service provider depend on the nature of the interactive services it offers. The Access Control Services that are specified in Schedule 1, Part 1, 1(a) of the Licence are:

• Message Processing Services, such as encryption, scrambling of digital services not to be made generally available;
• Authentication Services, such as services which identify an end-user or a set top box in order to permit or deny access of that end-user or set-top box to a digital service;
• Access Device Management Services, such as services which operate or actuate the set top box;
• Selection Services, such as the operation of an electronic programme guide through which the end-user chooses digital services; and
• Subscriber Management Services, such as the preparation of smart cards or the on-line updating of entitlements.

2.8 However, this list is not exhaustive. Services other than those specifically listed could be regarded as being "Access Control Services" in terms of the Licence. Nevertheless, for the purposes of this determination the term "Access Control Services" refers to those services listed in the Licence.

2.9 Not all digital interactive TV services use Access Control Services. For example, Web pages broadcast unencrypted may not require Access Control Services. However, because Access Control Services are used to ensure that only approved applications can be accessed by end users it is expected that most digital interactive TV services will use Access Control Services.

2.10 There are currently four suppliers of Access Control Services in the UK: SSSL, ONdigital, CWC and Kingston Communications Limited (KCL). SSSL supplies Access Control Services to Open and to BSkyB for its Sky Sports Extra channel. Open is the interactive services provider arm of BiB, the joint venture between BSkyB, BT, Matsushita and HSBC. ONdigital, KCL, and CWC self-provide Access Control Services in respect of their digital interactive TV services. Ntl and Telewest will also self-provide Access Control Services when their digital interactive TV services are launched in the future.

2.11 When it assessed the level of the market related to Access Control Services the European Commission defined a broad market for "technical and administrative services for digital interactive TV services and retail pay-TV". This market definition encompasses a wide range of technical services offered by digital platform operators (and other companies) including access control services, conditional access, customer management services, transactions management systems and so on.

2.12 The European Commission considered that "there may be distinct markets [within the market definition set out above] in respect of, at least, conditional access, access to the EPG and access to the API". However, it decided that it was unnecessary for the purpose of analysis of the BiB case to determine markets at a greater level of detail.

2.13 The purposes of this analysis are narrower than the European Commission’s focus. We have therefore considered whether there is a separate economic market for Access Control Services.

2.14 The Director has considered this using the standard approach to market definition, which looks at the constraints placed on the price-setting behaviour of a hypothetical monopolist supplier of the service in question. This takes into account the existence of both demand and supply-side substitutes. If customers could readily switch to another service with similar characteristics this would constrain the ability of the hypothetical monopolist to sustain such a price increase. A similar constraint would apply if suppliers of other services could readily switch production into the service supplied by the hypothetical monopolist. The relevant economic market includes any such demand and supply-side substitutes.

2.15 On the demand side there are no close substitutes for Access Control Services for service providers that want to provide digital interactive TV services for which there is a charge or from which they intend to derive revenue. In particular, the other types of technical services contained within the European Commission’s broad market definition are not demand side substitutes.

2.16 A key issue is whether Access Control Services supplied on all types of broadcasting platform should be regarded as being in the same market. There are switching costs for service providers because each platform operator uses a different, proprietary technology for providing digital interactive TV services. To switch platforms involves "re-authoring" of content. If they are sufficiently large, switching costs might mean that Access Control Services delivered over each platform should be regarded as being in a separate economic market.

2.17 However, the strength of SSSL’s market power would be found to be greater if Access Control Services delivered over each platform were to be found to constitute a separate economic market. Furthermore, while there are re-authoring costs, there is no evidence to lead the Director to the belief that they are such that it is necessary to define platform-specific markets. For these reasons, the Director leaves open the question of whether there are separate, platform-specific markets.

2.18 On the supply side there are unlikely to be any alternative services which should also considered to be within the relevant market.

2.19 In its consideration of the geographic scope of the market the European Commission concluded that the relevant geographic market is the UK. The Director sees no reason for departing from this view.

2.20 The Director therefore concludes that the relevant economic market for the purposes of this determination is the market for Access Control Services supplied in the UK.

Assessment

2.21 Condition 9.3 of the Licence sets out the factors which the Director may take into account in assessing the market power of a Licensee. The Director has considered the factors listed in Condition 9.3. He considers that the key factors that are relevant in this case are the level of SSSL’s market share and the level of barriers to entry to the market.

Market share

2.22 Given the relatively recent development of the relevant market it is important to examine both current market shares and likely trends in the market shares of firms in the market. This assessment will need to be revisited as the market changes over time.

2.23 There is a variety of methods which might be used to evaluate market shares. The most useful measure would be in terms of revenue received from digital interactive TV service providers. However, apart from SSSL’s supply of services to Open, which is a separate company, at present each provider of Access Control Services supplies them only to its own service provider. It is clear that in these circumstances, revenue shares would not be meaningful.

2.24 For the purposes of this assessment, a number of factors have been used as indicators of the market share of firms in the market. In particular, the number and range of digital interactive TV services that use Access Control Services and the relative "reach" of competing platforms have been assessed. The latter is considered important because, all other things equal, a platform will be more attractive to service providers the more customers it has.

(i) Current market share

2.25 Open, which uses SSSL’s Access Control Services, provides a significant number and range of services. Table 1 sets out the interactive services available via Open.

Table 1.

Digital interactive TV services available via Open

2.26 In addition, Open also provides TV e-mail and a number of games. SSSL also supplies Access Control Services for Sky Sports Extra which is an interactive sports channel.

2.27 At present around 1.3 million subscribers have digital satellite set-top-boxes that receive Open’s services (BSkyB results for 3 months ending 30 September 1999).

2.28 In contrast, there are currently relatively few digital interactive services available on other platforms. Such services are restricted to games on ONdigital, a package of local shopping and information services on KCL’s KIT service and TV access to a number of Web pages on CWC’s service. These services are also available to a significantly smaller population of users. ONdigital currently has around 411,000 subscribers; KCL has only begun supplying services and has a maximum reach of 155,000 customers; and CWC is providing services on a trial basis in Manchester only.

2.29 This evidence on the range and number of digital interactive TV services and their respective reach has led the Director to conclude that SSSL currently provides the vast majority of Access Control Services in the UK.

(ii) Future changes in market share

2.30 The future pattern of market shares is difficult to predict. A range of factors will affect the development of the market over time. The most important are:

2.31 It is clear that SSSL’s high market share is likely to diminish over time as other platforms begin to develop and offer digital interactive TV services. In the next few years cable operators, Kingston, BT and service providers using BT’s network are likely to be in a position to offer similar services to those currently offered over the digital satellite platform. They may also have an important advantage over the digital satellite platform in that they may be able to offer fast, "always on" Internet access as part of a package of digital TV and interactive services. If so, this is likely to make such packages attractive to end users and, hence, make these platforms attractive to digital interactive TV service providers.

2.32 ONdigital also plans to expand its range of interactive services, although the number of such services provided is restricted by the limited bandwidth currently available and the restriction in digital terrestrial operators’ licences which specifies that a maximum of 10% of licensed digital terrestrial broadcast capacity can be used for interactive services. Other operators on the digital terrestrial platform may also provide digital interactive TV services in the future. This would require the supply of Access Control Services from ONdigital.

2.33 However, a number of factors point to the likelihood that SSSL will continue to supply the majority of Access Control Services for the foreseeable future. In particular, these are:

• the extent of the "reach" of the digital satellite platform both in terms of its geographic coverage and likely subscriber numbers; and
• the first mover advantages achieved by BSkyB in the launch of digital TV and Open in the provision of digital interactive TV services.

2.34 The Director takes the view that SSSL’s high market share in the market for Access Control Services is likely to persist for the foreseeable future. However, in view of the likely development of competition it will be necessary to keep this position under review.

Barriers to entry

2.35 A large market share does not in itself give a firm market power as its behaviour may be constrained by the possibility of entry into the market. In determining the extent of SSSL’s market power it is therefore necessary to consider the extent to which its behaviour is constrained by possible competitors in the market for Access Control Services.

2.36 The principal source of potential competition to SSSL’s position in the market is from the launch of new digital platforms.

2.37 Although it may be technically possible to set up an alternative digital satellite platform it would involve significant sunk costs associated with the acquisition of suitable technology, investment in provision of set-top-boxes to consumers and establishment of a brand image. There are significant economies of scope between the provision of Access Control Services and conditional access services. A new digital satellite platform operator would therefore seek to enter into the supply of both services. This increases the level of sunk investment required to enter the market. Sunk costs are an entry barrier. The potential entrant needs to be confident of recovering its entry costs. However, there is a danger that the incumbent will set prices, post-entry, which do not recover its sunk costs. Hence, entry tends to be deterred by the existence of high sunk costs. The Director is not aware of any plans for an alternative digital satellite platform.

2.38 This argument also applies to other delivery methods. In terms of cable networks, the large sunk costs and incumbency advantages of existing operators make it unlikely that a new cable network of significant scale would be built. On the digital terrestrial platform existing broadcast capacity has been fully allocated, precluding entry.

2.39 This consideration of the likely barriers to entry in the relevant market leads the Director to believe that SSSL’s power in the relevant market is not significantly constrained by the possibility of new entry.

Conclusion

2.40 The Director takes the view that SSSL’s significant majority market share of the market for Access Control Services in the UK, combined with the significant barriers to entry to this market, provides it with a high degree of market power.

2.41 Condition 9.5(b) of the Licence states that a Licensee will be in a dominant position when it is in: "a position of economic strength which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately consumers". The Director considers that the arguments set out above support a finding that SSSL currently has such a position of economic strength.

2.42 However, it is clear that there is a likelihood of greater competition to SSSL in the future which may erode the market power it currently holds. The Director intends to keep developments in the market under review in order to ascertain whether SSSL continues to hold a position of dominance in the market for Access Control Services.

3. Forbearance

3.1 The trigger allows the Director to dispense with conditions or parts of conditions that are activated by a Regulated Supplier determination if, having regard to his statutory duties, he deems it unnecessary to apply them. The Director is not at present minded to disapply any conditions or parts of conditions. However, he would be particularly interested in the views of consultees on this point.

Annex

Planned provision of digital interactive services in the UK

The planned provision of digital interactive TV services in the UK is as follows:

Telewest

Telewest launched a digital TV service, called "Active Digital" at the end of October 1999. Active Digital was launched in the Midlands. In December it will be extended to franchises in the South West and the South East of England and then rolled out to London, the North-West, North-East, Yorkshire and Scotland. By Christmas 1999 it is expected to cover 50% of the 4.3 million homes passed by Telewest. The target is 90% reach by June 2000. The remaining 10% may take longer as some of the older networks, and systems acquired from other operators, require some upgrading.

Telewest has announced its aim of having 500,000 customers subscribing to digital service by the end of 2000.

High-speed data links for PCs, Internet access on the TV, TV-based e-mail and other interactive services are to be launched early next year. A range of interactive, on-demand products is in development, which include Internet-based shopping, e-commerce and entertainment services

Kingston Communications Ltd.

Kingston Communications launched its interactive TV service using ADSL in October 1999. The service is Internet based and offers customers in Hull digital multi-channel broadcast television, true video on demand, e-mail and fast Internet access and local news, shopping and information delivered to their home over Kingston's existing telecommunications network.

The package is branded as "Kingston Interactive Television". Its free-of-charge interactive services, called "Local Link", provides interactive shopping, local community information and news provided in conjunction with the Hull Daily Mail. Local Link also offers local businesses the opportunity to advertise "on demand".

The service is initially available to 1,500 customers. This will be followed by a phased roll-out to Kingston's 155,000 strong residential customer base.

NTL

Ntl has announced that the launch of digital interactive television services will take place in early 2000. It has forecast that it is aiming to have 250,000 subscribers to its digital cable services by mid-2000.

CWC

CWC has begun providing digital television services on a trial basis in Manchester. Its package includes e-mail and access limited number of Web sites, some of which offer shopping, information and banking services.

ONdigital

ONdigital launched digital television services in November 1998. Although it has announced its intention to supply e-mail, Internet access, onscreen shopping and banking, and multi-player games, at present there is a selection of single-player games available.

Consultation

The consultation on this notice will run until 10 December 1999. Comments are invited on any aspect of this notice. For full details of the consultation process see Schedule 1, Part 1, paragraph 6 (a) – (g) of the Licence.

Written comments should be sent to:

Anil Patel
Consultation stage 1: SSSL determination
Oftel
50 Ludgate Hill
London EC4M 7JJ

Fax: 0171 634 8893

Comments on this document can also be sent by email

Written comments will be made publicly available on Oftel’s website except where respondents indicate that their response or parts of it are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly marked as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.

Oftel is willing to set up a link between this document on Oftel’s pages and any responses placed on respondents’ own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 should you wish to arrange this.

Confidential responses should not be sent via the Internet.

Alternative formats

Oftel documents are also available in alternative formats. Copies on disk in various formats and in large print are available. We also offer braille and tape copies of the summary on request. Please contact the Oftel Research & Intelligence Unit on 0171 634 8617, or e-mail or call Textphone 0171 634 8769 for more information.

Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document and/or press release is published and placed on Oftel’s web site  subscribers to the list receive an e-mail informing them about the document or press release. If you would like to join then please click here.