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| The pricing of conditional access services and related issues - 30 October 2001 | |
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A Consultation
Document issued by the Director General of Telecommunications Chapter 1 The legal and regulatory framework Chapter 2 Conditional access tariff structures Chapter 3 Public service broadcasters and conditional access Chapter 4 Costs and benefits analysis S.1 Oftel is responsible for the regulation of encryption and other ‘conditional access’ services needed by digital broadcasters in order to supply services to those viewers who are authorised to receive digital television services. Oftel issued guidelines on regulation and pricing in April 1999 (Digital television and interactive services (statement) and The pricing of Conditional Access and access control services (guidelines)) Oftel now wishes to consider whether the guidelines need updating in light of the experience of the operation of these services. S.2 This consultation document covers three main areas:
S.3 Those providing conditional access services do so under the Conditional Access Services Class licence. This enables 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". In exercising his powers, the Director General would normally act in accordance with the above mentioned guidelines, giving reasons if not. The Director General may also determine complaints about conditional access using his powers under the Competition Act 1998. S.4 This consultation document seeks views on whether Oftel should regulate conditional access through a licence modification to allow the Director General to set ex ante prices for conditional access. S.5 The Oftel preliminary view is that to set a price control in advance of commercial negotiation would be inappropriate and disproportionate, but we also consider that there may be a case for further guidance on the factors that conditional access operators should take account of in ensuring that tariff structures are fair, reasonable and non-discriminatory (FRND). The Director General would expect companies to take account of this guidance and this would be a factor in any decision he may have to take. S.6 Chapter 2 sets out possible ways in which a conditional access supplier could structure tariffs and the potential effects of different tariff structures. The aim of the tariff structures should be to maximise competition and consumer choice. S.7 In Chapter 3 Oftel considers the special circumstances of public service broadcasters. Oftel’s initial view is that public service broadcasters should pay a commercial rate for conditional access services. However, Oftel also consider that there would be merit in additional guidance so that the special circumstances of public service broadcasters can be taken into account in applying the ‘fair and reasonable’ requirement. Paying a commercial rate does not necessarily imply paying the same price as a non-public service broadcaster. S.8 In Chapter 4 Oftel sets out its approach to the use of cost benefit analysis in its decision making. S.9 In Chapter 5 Oftel sets out the process of consultation. Responses are requested by 25 January 2002.
The legal and regulatory framework Background to conditional access regulation 1.1 Oftel is responsible for the regulation of conditional access services needed by broadcasters in order to supply digital television services to those viewers who are authorised to receive them. Conditional access services include encryption services, subscriber authorisation services, subscriber management services and certain other technical services required to display a broadcaster’s digitally transmitted services to viewers. 1.2 The obligation to supply conditional access services on a fair, reasonable and non-discriminatory basis (FRND) stems from the Advanced Television Standards Directive (95/47/EC – ‘the Directive’). The Directive was implemented in the UK by the Advanced Television Services Regulations 1996 (SI 1996 No. 3151) and the Advanced Television Services (Amendment) Regulations 1996 (SI 1996 No. 3197) (together hereinafter ‘the Regulations’). As a result, Oftel regulates the running of telecommunication systems for the provision of conditional access services through a so-called ‘class licence’ granted by the Secretary of State for Trade and Industry under section 7 of the Telecommunications Act 1984 (that licence was first granted on 7 January 1997, but which was very recently revoked and an equivalent new class licence granted on 1 August 2001) (the ‘CAS Class Licence’). 1.3 Any undertaking providing conditional access services in the UK must register under the CAS Class Licence and comply with the terms set out in this Licence. Sky Subscribers Services Ltd (SSSL) and ITV Digital are currently registered under that licence. Therefore these operators must provide conditional access services on a FRND basis. Although cable operators such as Telewest and NTL are not exempted from the legislation, they will not in practice be bound by the CAS Class Licence until such time as they offer access to their networks to content suppliers independently of their own packages of services and market conditional access to such suppliers. 1.4 Oftel has issued legally non-binding guidance in this area (see Digital television and interactive services (statement) and The pricing of conditional access and access control services (guidelines) 04/99) which sets out how the Director General of Telecommunications (‘the Director General’) would be likely to interpret the meaning of FRND in the event of a complaint. 1.5 The Director General may investigate the provision of conditional access services under the Competition Act 1998, if he suspects that there is a breach of any of the prohibitions against anti-competitive agreements or abuses of a dominant position in that Act. Where an agreement or conduct breaches both the Competition Act prohibition(s) and a CAS Class Licence condition (such as the above-mentioned obligation to supply services on a FRND basis), the Director General may take enforcement action under that Act, provided he is satisfied that it is the most appropriate way of proceeding with the matter. The Director General’s increased powers of investigation and, for example, his ability to impose financial penalties under the Competition Act puts incentives on conditional access operators to avoid a breach of that Act. 1.6 Oftel considers that the offering of conditional access services on a FRND basis should achieve the following objectives:
Oftel’s approach to conditional access regulation 1.7 It is clear that the method by which the Director General secures compliance with the conditions in the CAS Class Licence will have a significant impact on the supply of conditional access services. Oftel is obliged to ensure that conditional access services are supplied on a fair, reasonable and non-discriminatory basis. Oftel must therefore consider whether or not existing regulation is sufficient for the carrying out of that duty or, if not, adopt new or further regulation. 1.8 As the Directive and hence the CAS Class Licence applies to all suppliers who produce and market conditional access services the conditional access regime does not fit with Oftel’s general regulatory approach. Oftel would usually apply regulation only after an assessment and finding of market power in the relevant market, a process which does not apply under the CAS Class Licence. As such, Oftel believes that the method of regulation of conditional access should be proportionate to this particular circumstance and mindful of the fact that there has been no formal assessment and finding of market power. 1.9 To date Oftel has relied on ex post enforcement mechanisms to ensure that the FRND requirement is met. Oftel has two such enforcement routes open to it. First, Oftel can act under the terms of the CAS Class Licence. If the parties fail to reach agreement they can refer the issue to Oftel. Oftel is required by the licence to resolve the dispute by determination of the appropriate terms of conditions. Second, and this route does depend on a finding of market power in a relevant market, Oftel can also act under the Competition Act if there were reasonable grounds for believing that a conditional access operator who has a dominant position in the relevant market was breaching the prohibition on the abuse of dominance. To date no evidence of such an abuse has become available. 1.10 Oftel has reviewed whether it would be appropriate to move to an ex ante form of control. The main approach Oftel has considered is one whereby Oftel would determine the initial price and then apply a price control in the form of RPI-X, ie conditional access providers can change prices within the boundaries of this control. Introduction of such a control would require a change to the conditions of the CAS Class Licence. Oftel would continue to retain the power to resolve disputes over other terms and conditions apart from price. 1.11 The Oftel strategy, reflected in the recommendations of the Better Regulation Task Force, follows the principles below. The regulatory mechanism that is most appropriate to conditional access pricing should conform to these principles:
1.12 The following table sets out some of the pros and cons of either keeping the current regime or moving to some form of ex ante price control:
Question: (1) Do respondents agree that these are the relevant pros and cons that need to be considered for the purposes of assessing Oftel’s regulatory approach? 1.13 Oftel’s approach in this area so far has been to introduce measures in the form of licence conditions which are not unduly interventionist and yet still ensure that the regulatory objectives as set out above are fulfilled. Oftel considers that ex ante intervention of this nature would constitute a significant policy change, and in order for such an approach to be justified it would have to be clear that such intervention was necessary and that it was proportionate to do so. 1.14 Under the current approach the parties involved have the flexibility to pursue negotiations that best serve their business strategies, as long as those strategies do not prejudice the underlying objectives. Oftel is required and ready to investigate any complaint about the terms of supply. 1.15 Although the obligation to supply conditional access services on a FRND basis applies irrespective of the level of market power in the relevant market, Oftel considers that the regulatory mechanism to be adopted should be proportionate to the state of competition in the market. For example, Oftel considers that advance price setting or a price control should be considered only where the state or threat of competition is insufficient to act as a competitive constraint on the actions of a market player. This is in line with Oftel’s strategy. 1.16 As a possible indicator of the effectiveness of the current regime, Oftel has not received any formal complaints concerning the pricing of conditional access services. Since the launch of digital services in the UK, a number of free to air broadcasters, pay per view broadcasters and subscription broadcasters have negotiated conditional access deals on the digital satellite platform. Conditional access deals have been successfully negotiated on the digital terrestrial platform. 1.17 The digital TV marketplace is still relatively immature – Oftel must therefore seek to ensure that any action does not place a disproportionate burden on conditional access operators. The regulatory options should obviously be measured against the market in which they will be operating. It would therefore have to be established that there was a significant need for a change, as an amendment to the current regulatory framework in the form of a price control would be a particularly interventionist step. 1.18 Oftel’s initial view is that the most appropriate approach remains reliance on commercial negotiations within the framework set out in the current Oftel guidelines, with regulatory intervention only in the event that they fail to be resolved to the satisfaction of the parties. Oftel’s initial view is also that more direct constraint of prices through a licence modification would be unduly intrusive, as well as administratively burdensome, without sufficient compensating benefits. However, Oftel is consulting on whether this approach remains valid. Questions: (2) Do respondents agree with Oftel’s provisional conclusion that there should not be an ex ante price control set by Oftel? (3) If the current approach is confirmed, is there a need for greater detail or precision in any area of the guidelines and, if so, what detail or precision do respondents find necessary?
Conditional access tariff structures Pricing and economic efficiency 2.1 Most of the costs involved in setting up and running conditional access systems do not vary with the number of channels provided (eg the development costs of the system and the costs of set-top box subsidies), and the presence of economies of scale and scope mean that the incremental cost of supplying conditional access to one particular channel is likely to be low. However, as the fixed and common costs must be recovered, it is clearly impossible for the supplier of conditional access to charge a price equal to incremental cost to every purchaser. 2.2 The economically efficient way of pricing in markets such as that for conditional access is likely to be to charge higher prices to customers (broadcasters) who attach a greater value to conditional access – ie they have a greater willingness to pay. The corollary of this is that lower prices can be charged to customers who might otherwise be priced out of the market, thereby maximising usage of the conditional access system. 2.3 For instance, a premium channel would be likely to be able to bear a higher conditional access charge (without material detriment to its business) than a free-to-air channel or one which retailed at a modest price. Accordingly if the premium channel were to be charged a higher price for conditional access so as to recover a bigger proportion of fixed and common costs, then this may allow the conditional access supplier to reduce the share of joint and common costs (and hence the conditional access charges) paid by other kinds of channel. This may increase overall usage of the system and widen consumer choice, since if both types of channel were charged the same price the latter may decide not to be carried on that particular digital TV platform at all. 2.4 Hence, in order to secure overall economic efficiency, it is Oftel’s current practice to allow for some degree of price variation in conditional access charges between types of channel which are not in direct competition with one another. It is likely that such an approach will lead to increased consumer choice without giving rise to competition problems. 2.5 The fundamental requirement that services must be supplied on a FRND basis does, however, impose some constraints in the degree of price differentiation which can be practised. The Oftel approach in considering whether prices are non-discriminatory is to consider whether or not the price differentiation gives rise to a material restriction or distortion of competition. In practice this means that differentiation between service providers which operate in different economic markets should not normally be a problem; while differentiation between service providers in the same economic market will require objective justification. Tariff structures for conditional access 2.6 The provision of conditional access services will involve a variety of different cost elements. A number of different tariff structures can be embraced within the requirement to provide conditional access services on a fair, reasonable and non-discriminatory basis. The overriding consideration is that the tariff structure should fulfil the objectives set out in paragraph 1.6. 2.7 Oftel considers that the structure of tariffs for conditional access should be set so as to recover total costs over a reasonable period, including a reasonable allowance for the cost of capital. It is the case that most conditional access costs are in practice driven by additional connected end users, especially those who receive subsidised equipment (set top boxes). However conditional access providers may find it makes more economic sense to recover costs such as the cost of subscriber equipment through charges to service providers, rather than attempt to recover them directly from users. This also reflects the fact that broadcasters on a digital platform benefit from increased takeup of digital services by end users – through the potential increase in viewers, and eg potential increase in subscription revenue and advertising revenues. 2.8 Oftel considers it would not be appropriate to be too prescriptive about how companies chose to recover their costs. However, any tariff structure should be of benefit to consumers in the long term. Hence any structure which has the effect of unreasonably excluding certain categories of service from the market or which lead to a material adverse effect on competition would be unacceptable. 2.9 Oftel believes that consideration of the benefits experienced by the different categories of service will assist in offsetting distortions of competition or exclusionary effects. In particular the expanded market arising from equipment subsidy may have benefits for all categories of service providers wishing to increase their potential market for viewers or sales. 2.10 As stated above, the most economically efficient way of charging for conditional access is likely to involve some variation in pricing, depending on the service to the end user. Since the economically efficient levels of pricing will depend on the individual circumstances of the relevant channel, it will also be the case that a wide variety of pricing structures will be fair, reasonable and non-discriminatory. 2.11 A vertically integrated supplier of conditional access services must not supply its own downstream business on terms which are more favourable than those offered to third parties. (it should be noted that in order to prevent a margin squeeze the downstream provider of conditional access should make a reasonable return after charges to the upstream business). However, it might still be the case that such a supplier would endeavour to structure tariffs in a way that might benefit its own business model. Such a practice might not in itself be abusive, although regulatory intervention may be justified in the event that a different tariff structure would better promote competition and consumer choice. 2.12 Because of the different ways of delivering FRND pricing, there are a number of different tariff structures which a supplier could apply in charging for conditional access services. Oftel will consider through this consultation whether or not it should specify in a future set of conditional access pricing guidelines that one particular tariff structure for charging of conditional access would be more or less likely to be considered to be FRND. Some of these options are discussed below. Combinations of such options would also be possible. Option A: Charging a price which varies with the number of channels carried in a retail package 2.13 One option is for an element of the charge for conditional access services to vary according to the number of channels carried in the relevant retail package. This might have the effect of reducing barriers to entry for individual channels relative to packagers of channels, since the fixed and common costs would be more evenly divided between channels. It would also seem to reflect reasonably well the benefits of equipment subsidy (increased audience reach etc) since these seem likely to be independent of whether a channel is marketed independently or as part of a package. 2.14 However, this criterion may deter entry of packagers of bundles of channels, which might tend to depress consumer choice. It may also reduce the possibility of additional channels being provided to the consumer via the enhancement of an existing package as it would increase the marginal cost of introducing a new channel to that package. Option B: Charging a price which varies with the retail price of the package of channels 2.15 It may be possible to construct a tariff for conditional access services which is based in part on a percentage of the retail price of the relevant package. This could facilitate entry by encrypted free-to-air services or those which retail for a modest amount. 2.16 This would relate the cost of conditional access more directly to the value of the channel to the consumer and may have the effect of increasing the number of services available on a platform. It may also reflect reasonably well the benefits of subsidy since, other things being equal, a service able to command a premium price would benefit more from equipment subsidy than one which retailed for a modest price. 2.17 The effect of a tariff structure that is based on the retail charge of the channel or channel package is that it would be a proxy for the value of the channel. However it must be noted that there is, of course, also a value to the consumer of free-to-air channels and so they derive a benefit from broadcast on a platform, through increased viewing or the ability to increase advertising revenues or to attract consumers to other pay content. Oftel believes that it would be unreasonable for such channels not to contribute to the cost of conditional access provision: contribution to the cost of the service is the outcome which would be expected in a competitive market, so there would have to be another method of arriving at the value of a free-to-air channel. For instance, in the case of public service broadcasters the retail price cannot be seen as a proxy for their value to the end user. 2.18 Another problem with such a structure is that the conditional access charge would vary as retail price changes. As the conditional access provider would not in general have control over the level of retail price, this would be under the control of the channel provider, this may create instability for suppliers of conditional access services. In order to gain more information to counter this instability this could lead conditional access providers to requests for commercial information about eg a channel provider’s forecast of retail prices and consumer take up in order to structure tariffs. Option C: Charging a price which does not vary with the number of channels in a retail package, or with the retail cost of that package, but is instead a fixed charge per package of channels. 2.19 Such a tariff structure would recognise that the supplier of conditional access services may experience economies of scale, ie the cost of supplying conditional access to a single stand-alone channel may not vary significantly from the cost of supplying conditional access services to a package of many channels. But such a tariff structure may, in theory at least, deter single stand-alone channels from obtaining entry onto digital TV platforms, if, for instance, a single channel were charged the same price for conditional access as a larger package of channels. Other variations 2.20 In each case, there could be differential charges/discounts based on the type of channels carried within the retail package, eg a package including premium channels could be charged more for conditional access than one composed entirely of basic channels. Questions: (4) Do respondents believe that one particular tariff structure for the provision of conditional access services in Option A to C is more likely than others to be fair, reasonable and non-discriminatory and if so why? If this is the case should Oftel set out in the form of a future set of guidelines what this tariff structure is likely to be? (5) Do respondents agree with Oftel’s preliminary conclusion that an economically efficient outcome is more likely where a greater degree of flexibility over pricing is retained by the conditional access supplier? Tariff structure and market entry 2.21 Oftel would welcome evidence from respondents which would assist in considering the impact on entry of current conditional access tariff structures. It has been suggested, for instance, that the current structure and levels of conditional access pricing could prevent entry into particular retail markets. For example, it has been suggested that conditional access charges which do not vary according to the number of channels within the relevant package acts as an effective barrier to entry of new stand-alone channels which may be in direct competition with individual channels in other packages. 2.22 Oftel does not believe that the lack of entry from basic subscription stand-alone channels would in itself suggest that the conditional access tariff creates a barrier. It seems likely that this reflects other factors such as marketing costs that may make it uneconomic to launch basic subscription channels outside packages. However, this argument does not necessarily apply to promoters of stand-alone premium channels. 2.23 Another example of possible restriction or distortion of competition is in the case of retail packages of basic pay TV channels (ie those which are not premium channels charged for separately). It has been suggested that the fact that there is not currently more than one provider of a subscription package of basic retail pay TV over digital TV platforms is a possible indication that the current structure of conditional access tariffs acts as a barrier to market entry. 2.24 Although this argument may have some merit, there could well be other reasons why a number of different retail packagers of pay TV programming have not emerged. For instance, another packager would have to incur expenses (including sunk costs) in obtaining customer management services (such as the enabling of viewing for its TV packages), in marketing its retail package, and in obtaining transmission capacity over the relevant digital TV platform (which may, in addition, be limited). 2.25 Also, it may be the case that packagers of a large bundle of channels are more likely to make higher returns than those of smaller bundles of channels. This could make it difficult for a packager of a small bundle of pay TV channels to compete successfully against a packager of a large bundle. Such an advantage may, in turn, be reinforced if the packager of the large bundle were to secure exclusive contracts with a number of channel providers. Questions: (6) Do respondents believe that the current structures of conditional access charges need to be altered in order to facilitate entry by independent retail bundles of channels, or is competition in the relevant market sufficiently effective? Is so what should the new structure be? Tariff structure & recovering subsidy from charges for television and interactive services 2.26 Previously Oftel has considered the extent to which an operator can recover subsidy through charges to service providers for access control and conditional access services respectively. Oftel has also previously consulted on this issue (Digital television and interactive services: ensuring access on fair, reasonable and non-discriminatory terms, March 1998 ). It is acceptable for differential levels of subsidy to be recovered through television services on the one hand and interactive services on the other. While the level of the current split of subsidy recovery between these services cannot be considered to be fixed for all time, Oftel sees no pressing need to consider it at the moment given the relatively immature state of the markets, particularly in the market for interactive services.
Public service broadcasters and conditional access Public service broadcasting as a category of broadcasters. 3.1 The concept of public service broadcasting has been developing over the time in the UK. Nowadays the category of public service broadcasters includes channels from a range of broadcasters with completely different structures, aims and economic behaviours. For the purpose of this document public service broadcasters are considered to be Channel 3 franchises, Channel 4, S4C, Channel 5 and the licence fee funded channels (BBC services). 3.2 The main discriminant of public service broadcasters is that they are subject to positive programming requirements, which require them to produce certain programmes which the market might not otherwise deliver. These are considered to create a burden on those broadcasters which might not be faced by other companies. However, the level of these obligations and method of enforcement vary between broadcasters. The burdens are also offset by benefits, including access to spectrum, must carry requirements on certain networks, prominence on listings and financial incentives to broadcast on digital platforms. These benefits also vary between broadcasters. 3.3 Public service broadcasters have an availability requirement, which requires that channels can be received by viewers at different parts of the UK at an affordable price. Whilst there is no legislative requirement on PSBs to make their channels universally available on all relevant digital platforms, there is an expectation from consumers that they will be available and it is Government policy to ensure that they are so available in the future. 3.4 Ensuring the availability of the public service broadcasting channels on the satellite platform leads to a potential need for conditional access. This is due to the fact that the footprint for a particular satellite may cause overspill of signal into other countries for which a broadcaster might not have the rights in which to show a particular programme or event. The provision of conditional access for the encryption of the signal and the automatic entitlement of reception for viewers with the relevant receiving equipment within the UK overcomes rights issues. Given this problem conditional access is only strictly necessary where the broadcaster needs to reach viewers that do not subscribe to a relevant package of other programming on the satellite platform – ie those who have a Sky dish and box but do not subscribe to Sky services. 3.5 Within public service channels there are different types of financially structured vehicles. There are licence fee funded channels (BBC), channels that are state owned and ‘not for profit but advertising funded (Channel 4 and S4C) and there are purely commercial channels funded by advertising revenue (Channel 3 franchise companies and Channel 5). 3.6 The reach of public service channels on analogue terrestrial varies depending on the channel: BBC 1 and 2 (with regional variations) and Channel 3 (with regional franchises) have a near-universal reach; Channel 4 is available in the UK apart from Wales; S4C, in Wales; and Channel 5 has a reach of around 80-85% of the country. 3.7 A number of public service channels have been launched on digital platforms. These are only available to consumers who have the relevant digital receiving equipment: BBC Knowledge, BBC Choice, BBC News 24 and BBC Parliament, Channel 4, S4C and Channel 5 are all currently available on Digital Terrestrial (DTT), Digital Cable and Digital Satellite, Channel 3 is available on Digital Cable and DTT. 3.8 Oftel’s current above mentioned guidelines of April 1999 state: "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" 3.9 Oftel is considering whether the previously published view would benefit from further clarification. It could be read that this prohibited any "discount" to public service broadcasters which could not be justified strictly by a reduction in costs. This goes beyond Oftel’s intention, although it would not be justifiable, from Oftel’s perspective, to offer any reduction in the cost of conditional access which had a materially detrimental effect on competition. 3.10 Due to the diverse nature of the broadcasters in question Oftel believes that it is not possible to define a simple and distinctive separate class for conditional access of ‘public service broadcasters’. However, Oftel believes that it may be appropriate for conditional access suppliers to distinguish according to a range of characteristics of broadcasters when drawing up conditional access tariffs while nevertheless avoiding material distortions of competition. Should public service broadcasters pay for conditional access services? 3.11 The regulatory regime specifies that the conditional access provider is required to charge all service providers, including public service broadcasters, a FRND rate for the provision of conditional access services. However, Oftel believes that it is proper to consider the special status of public service broadcasters which may justify different treatment under the obligation of FRND pricing. As a starting point for this consultation, Oftel considers that it is reasonable that public service broadcasters should pay a charge for services that they are consuming which reflects both the incremental cost of the provision of the service and a reasonable contribution to common costs. This is the outcome which would be expected in a competitive market and Oftel sees no justification for more favourable treatment. 3.12 It has been suggested that public services should not be required to contribute to common costs. However, as a general rule public services are expected to pay a commercial rate for all services they consume and such a rate invariably includes a contribution to common costs. This is undoubtedly the case, for example, in the charges paid by public service broadcasters for satellite uplinking, lease of transponders or for use of fixed or radio based telecommunications networks for programme distribution, electricity etc. Conditional access is only one of a number of technical services required to broadcast on digital platforms, and the cost of conditional access itself is not a barrier to such broadcasting. 3.13 However, none of the above necessarily means that it is appropriate to charge public service broadcasters the same as other consumers of conditional access services. Oftel notes, for example, that the current rate published for the digital satellite platform is considerably less in practice for public service broadcasters that are "automatically entitled" than for most others, albeit that the services provided in each case differ. 3.14 Oftel believes that there are arguments to support allowing consideration of the structure of the public service broadcaster and the nature of their obligations to be taken into account by the conditional access supplier in setting a price for conditional access. These are outlined below. Whether the channel can access new revenue streams via broadcast on digital platforms 3.15 Public service broadcasters, like any other broadcaster or channel, accrue benefit from the activities arising out of common costs such as the subsidy of set top boxes. However, the derived benefit may not be at the same level as that derived by other non-public service broadcasters, nor are the effects of cost recovery mechanisms the same as those for other broadcasters or, indeed, between different types of public service broadcasters. 3.16 Public service broadcasters are not able to benefit from a retail charge to consumers, but they are in competition with other broadcasters and channels for viewers and/or advertising revenue, and this should be taken into account in assessing whether their contribution to common costs is fair and reasonable. The level of benefits derived from broadcast on a platform may differ between public service broadcasters, for example between a licence fee funded channel and an advertising funded channel. In some cases these benefits are not directly quantifiable. 3.17 The fact that public service broadcasters have a free-to-air obligation means that they cannot gain subscription revenue from the broadcasting of their channels on digital platforms. In effect, they are not able to pass on the costs of conditional access to consumers as subscription broadcasters are able to do. It is argued that the lack of this revenue stream may in itself be a reason for differential pricing for public service broadcasters. 3.18 However, aside from subscription income, commercial public service broadcasters have the potential to earn additional revenue from broadcast on digital platforms, through for instance increased advertising revenue from increased reach, reduction in licence payments to the Independent Television Commission (ITC) for additional digital subscribers (the so-called ‘digital dividend’ for Channel 3 services) and revenue from interactive services. For example the digital dividend represents a clear and quantifiable financial incentive for Channel 3 services to launch on digital platforms and such reductions in payments to the ITC would exceed the costs of conditional access significantly. 3.19 Public service channels that take advertising are at a clear benefit from increasing the reach of their channels. Although the advertising funded public service broadcasting services are all available on analogue and so already have universal reach (within their franchise areas), it is possible that audiences are improved by ensuring carriage on digital platforms and access to electronic programme guides (EPGs). In particular Channel 5 services for instance would be available to a wider area of the country than it is currently available to. This would have the effect of a potential increase in advertising revenue – and potential effects on competition with other commercial channels as any potential gains in advertising revenue may be at the expense of other commercial channels. 3.20 As such additional revenue streams may not be open to the licence fee funded services it seems an argument might be made that only broadcasters who do not have the ability to take advantage of this additional revenue could be offered differential terms. In particular, where a public service broadcaster is commercially owned and run there is unlikely to be a direct benefit to the consumer of a reduction in costs of conditional access as the savings are as likely to be reflected in shareholder value as provision of programming. Questions: (7) Do public service broadcasters merit special treatment for conditional access purposes? (8) Should conditional access suppliers be able to consider the characteristics of a public service channel in constructing its tariff? (9) What evidence can respondents give of the benefits and costs to a public service broadcaster of being on digital platforms? (10) Should a differentiation be made between advertising funded commercial channels and the ‘not for profit’ channels? Whether a channel is "Must carry/must offer" 3.21 Provisions catering for the imposition of a "must carry" obligation on digital networks can be found in UK legislation under section 91 of the 1996 Broadcasting Act. These provisions apply to "local delivery services" and have not been enacted, possibly as the spirit of the legislation has been carried out by the cable companies. DTT has been dealt with in a slightly different way in that the public service broadcasters have been granted multiplexes through which they can deliver their public service channels. At the moment there is no obligation on public service broadcasters to provide their services on any platform apart from analogue terrestrial. However, the Government White paper ( see A New Future for Communications, DTI/DCMS, December 2000 which is available at http://www.communicationswhitepaper.gov.uk/) proposes a policy of "must offer" to certain digital platforms. 3.22 The legislative provisions for "must carry" were adopted on the understanding that there is a fundamental public interest in certain channels being universally available. This is also the reason for spectrum on DTT being gifted to public service broadcasting services. 3.23 However, the desire of public service broadcasters to ensure that there is universal availability of their services may lead them to take conditional access on the Digital Satellite platform. The purchase of conditional access in this instance is in order to ensure access for those viewers who have a dish and digibox but do not take a subscription to the main satellite broadcaster in the UK – BSkyB. As stated above, conditional access in this case ensures universal availability whilst protecting rights, although in some instances it could be used to restrict access to the UK where there are no rights issues at stake – for instance in order for the public service broadcaster to be able to market the same programming commercially in the rest of Europe. 3.24 Given the public interest of ensuring carriage of public service broadcasters on all digital platforms, it is argued that there should be a reduction in the costs to such broadcasters of supplying the additional digital platforms. On digital cable, for instance, cable companies do not charge the "must carry" channels for the cost of carriage on their platform, nor are they charged for such content. 3.25 It has to be noted, however, that there is a benefit to the cable operator in the carriage of "must carry" channels. These have some of the highest viewing by consumers and there is a high level of consumer expectation that such channels will be available. It is possible that without the "must carry" arrangements platform operators would have to pay a considerable amount to public service broadcasters for these channels. 3.26 It is also reasonable to assume that any costs to the commercial public service broadcasters (Channel 3, Channel 5) would be weighed up by them alongside the benefits derived in their application for their licence and therefore the price they would be willing to pay. 3.27 The White paper offers up the possibility that some channels will be designated in legislation as "must offer". The effect of this will be that certain public service channels will have to seek carriage on all relevant digital platforms. Once a channel becomes "must offer" on digital platforms, the decision whether to seek carriage is no longer in the gift of the broadcaster. It may be that in such an instance it would be reasonable for there to be differential pricing on the grounds that the channels do not have the option to avoid the costs of carriage, although Oftel would still expect such a charge to include a contribution to common costs. However it might be the case that the costs of a "must offer" obligation is met via other regulatory or legislative means. Question: (11) Is there any reason to link the charge for conditional access to the imposition of a "must offer" obligation and if so what level of adjustment is appropriate? What would be the consequences for other non-must offer channels?
(12) If there is, should the guidelines only be changed in respect of the "must offer" channels in the event that legislation creates such an obligation? Whether conditional access may be used for other non-public service channels 3.28 In some instances a broadcaster may provide a public service broadcasting channel and also provide other channels that do not have a public service broadcasting remit. This is the case, for instance, with ITV 1 and ITV 2. In such a case, depending on the tariff structure, they may be in a position to pay little or no more for conditional access covering all of the channels in a package that may be a mixture of public service and non-public service channels than they would pay for either channel individually. In such an instance the arguments for differential pricing on the basis of public service commitments in one or more channels are reduced, especially if the majority of channels in the package are commercial. Question: (13) Is it appropriate for non-public service channels to benefit from any differential pricing offered to public service channels? Whether the level and nature of public service obligations affects competition with other channels 3.29 It may be possible to relate any differential pricing to the level and nature of public service obligations. Public service obligations are those "positive" programming requirements that are imposed on a broadcaster in return for their licence. It may be argued that the greater the level of public service obligations or the more specific the nature (ie clearly providing programming not catered for elsewhere), the less likely it is that the channel is in direct competition with other channels. 3.30 Different public service channels have different obligations within legislation. It could be argued that a judgement should be made on the level and nature of public service obligations a channel holds as to what the level of differential in conditional access could be. 3.31 Neither the European or UK legislation which set in place the conditional access regime make any reference to how prices are to be arrived at for individual categories of broadcasters such as public service broadcasters. 3.32 It is also the case that in spite of the universal availability requirement and positive programme obligations that public service broadcasters operate under, it could be considered that certain public service channels are in direct competition with other non-public service free-to-air channels. 3.23 For example, if a public service provider of a youth orientated general entertainment channel was granted favourable conditional access terms on the digital satellite platform solely on the basis of the remit of the group which it belongs to and in the absence of further clarifications on the role of each part of that group with respect to public service provision, it could be argued that other non-public service providers of competing services on the platform might be disadvantaged in the provision of these service. This could ultimately be of detriment to the consumer. 3.24 It is possible that the granting of favourable terms for the existing analogue public service channels might have less of an impact on competition, since these channels are already universally available and might have a lesser requirement for conditional access services. However, it is clear from viewer ratings that the viewing share of existing universally available public service channels has fallen in multi-channel homes. Therefore these channels may still have a value attached to conditional access services, in particular where there is a commercial imperative to maintain audience levels. Questions: (14) Should the nature of public service obligations on a channel be taken into account in setting the price for conditional access? (15) Would differential pricing for public service broadcasters impact to the detriment of competition in the free-to-air category? Allocation of common costs 3.35 There are a significant amount of common costs involved in the provision of conditional access services. In principle a conditional access operator can differentiate between different broadcasters in order that system usage can be maximised. It would not be in the consumer interest if all broadcasters were charged the same conditional access price, as this could deter new entrants. However it is obviously important that the conditional access operator recovers common costs in a manner that does not have a material adverse effect on competition. 3.36 Pricing at incremental cost will not enable the conditional access operator to recover common costs – further analysis elsewhere in this document looks at the principles of cost allocation with respect to conditional access charges and on how the mark-up on incremental costs could be spread between broadcasters. 3.37 As stated, Oftel considers that it is reasonable that public service broadcasters should pay a commercial rate for services that they are consuming. This should reflect the cost of the provision of the service and should include a contribution to common costs. 3.38 If there is a reduction in the contribution to common costs from public service broadcasters this may cause a corresponding increase in contributions from other broadcasters. In effect, the burden would be shifted from public service broadcasters to other broadcasters and channel operators. Oftel believes, therefore, that any special arrangements for public service broadcasters should consider the likely impact of such a shift in burden on choice for consumers and incentives and costs to other suppliers of broadcast services to end users. Question: (16) Is there any justification for exempting broadcasters from contributing to the common costs of the conditional access system?
Cost benefit analysis 4.1 As part of this consultation Oftel will consider such information as is presented to it the costs and benefits of any potential regulatory action. Oftel will make changes to the conditional access regime only if the benefits to consumers are sufficient, taking into account the net change in costs to all interested parties. 4.2 As stated above, Oftel do not believe that there are grounds for the highly regulatory and interventionist step of ex ante price control. However, if respondents believe that this is worth serious consideration, Oftel would undertake a thorough cost benefit analysis. Oftel request that any respondents proposing such a move provide an assessment of costs and benefits including relevant figures for consideration. 4.3 However, on the other areas of consultation, Oftel does not believe that it will be necessary to carry out an extremely detailed cost benefit analysis in order to assess the merits of any proposed regulatory action. An appropriate assessment could be conducted at quite an aggregated level. 4.4 On the face of it, the costs of the regulated suppliers of conditional access should not change materially as a result of guidance leading to a change in tariff structure. Any such change would not be structured so as to inhibit a supplier of conditional access from recovering their reasonably incurred costs. 4.5 Oftel would not consider the individual costs of any one retailer of pay TV to be the key determinant of the assessment. What would be a relevant cost would be consumer detriment from fewer channels being available. The net costs taking into account all retailers would be reflected in the assessment of net consumer benefits Nevertheless, Oftel would wish to avoid as far as possible regulatory changes which led to significant increases in the costs faced by individual suppliers. 4.6 Oftel would find it helpful if any proposals for regulatory action were accompanied by a broad assessment of the consequential costs and benefits to the various parties.
Consultation How and when to comment 5.1 Oftel invites comments from interested parties on the contents of this consultation document by 25 January 2002. In particular, Oftel is interested in responses from consumers and industry on the questions contained in this consultation document. Oftel would also welcome any other data that potential respondents believe would assist Oftel to assess their approach to conditional access services. 5.2 Comments on the proposals should be made in writing and sent to: Ian Moss Oftel Tel: 020 7634 8861 e-mail: ian.moss@oftel.gov.uk Publication and viewing of responses 5.3 Confidential responses should not be sent via the Internet. Responses will be published on Oftel’s website in the Publications section under ‘Responses to Oftel consultations’, except where respondents indicate that the response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidential markings wherever possible. Appointments to view written comments in Oftel’s Research and Information Unit must be made in advance by telephoning 020 7634 8761 (fax: 020 7634 8946). If respondents would like to discuss the contents of this consultation document, please contact Ian Moss on 020 7634 8861. Alternative formats 5.4 Copies of this consultation document are available on disk. Accessible formats such as large print, Braille and audio cassette can be made available on request. 5.5 Please contact the Oftel Research and Information Unit on 020 7634 8761 or by e-mail at infocent@oftel.gov.uk for more information. 5.6 This document is available on Oftel’s website at www.oftel.gov.uk . Hard copies are also available from Oftel’s Research and Information Unit. Internet notification 5.7 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 is published and placed on Oftel’s website at www.oftel.gov.uk, subscribers to the list receive an e–mail informing them about the document. To register, please go to the What’s New section of the website and link to the electronic form. Next steps 5.8 Following the end of this consultation Oftel will publish a statement of conclusions and will proceed with any necessary changes to the conditional access guidelines or licence modifications as appropriate after taking into account views expressed by respondents. The consultation criteria 5.9 Oftel considers that this document meets the Cabinet Office code of practice on written consultation documents. The code is reproduced below for convenience. If you have any comments or complaints about this consultation process please contact: Oftel Co–ordinator
for the code of practice: tel: 020 7634 5350
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