Consultation document

May 2000

Contents

1. Introduction and aims

2. Market conditions

3. Impediments to these market conditions being in place

4. Consultation Details

Annex 1 - The Current Regulatory Framework

Annex 2 - The current state of play with digital TV services and equipment

Footnotes

1. Introduction and aims

1. The Government wants the switchover from analogue to digital television broadcasting to happen quickly and smoothly and to the benefit of consumers. In the interests of facilitating this the Government has asked the ITC, Oftel and OFT to provide advice on options for ensuring that the digital television market does not develop in such a way as to inhibit competition or set unnecessary barriers for consumers to access new services. The purpose of this joint consultation is to elicit information to help with the formulation of such advice.

2. The Government has stated that the analogue signal will be fully switched to digital when three tests - relating to availability, affordability and take-up - have been met. Under the availability test, all viewers who can receive analogue television now (99.4 per cent) must be able to receive the main free-to-air channels digitally; under the take-up test, 95 per cent of consumers must have a digital receiver in the home; and under the affordability test the switch to digital must be within reach of people on low or fixed incomes. The Government expects the tests to be met between 2006 and 2010.

3. A variety of factors will, separately or together, determine the rate at which Government’s preconditions for switchover can be met, and hence the switchover timescale. This consultation seeks to determine what these factors are, their relative importance and, if they represent obstacles to the take-up of digital television, to recommend how these obstacles can be removed. In addition the consultation should identify any need for Government or regulatory action to improve the accessibility to and the affordability of digital television.

4. Effective competition in all areas of provision in the digital TV supply chain should ensure that consumers get the best value for money and should continue to encourage a dynamic and innovative digital industry in the UK. The recently released consultation document "Competition in e-commerce – a joint Oftel and OFT study" can be found on the Oftel or OFT website. This concentrates on the emerging barriers to competition in electronic markets and should be read as a complement to this study. A summary of the current regulatory framework and the powers of Oftel, the OFT and the ITC in regard to digital television is given in Annex 1.

5. The familiarity of television and the capabilities of digital give this technology the potential to be a prime means for widespread domestic use of the internet in addition to new and traditional programme services. This is reflected in the Prime Minister’s goal of universal access to the internet by 2005, with digital TV being an important way of ensuring this widened access.

6. The increased capabilities of digital television also create new opportunities in providing information and education, some of which will be interactive. As such, the switchover to digital TV should also be seen alongside the goals of wider access to Government Services at a national and local level. The Cabinet Office Minister, Ian McCartney, stated in January that "digital television will be one of the key weapons in tackling social exclusion and improving the convenience of public services". More details on the services available and on the receiver options for digital television are given in Annex 2.

7. However, the achievement of these goals depends on ensuring that digital television is readily accessible to all and on reasonable terms. It is also important that the market develops in a way that is open to competition. Potential obstacles - or hindrances - to the development of the market may be economic or technical in nature, or may lie in the characteristics of the services offered. Often, they may be inter-linked.

8. The potential barriers also differ depending on whether the services in question are free-to-air television, pay TV or new services such as interactive TV or internet access. Hence, the main aims of this consultation are to:

• Identify the barriers to the take-up of digital television for those consumers interested in receiving a wider choice of channels including pay TV, and to identify steps that might be taken to reduce these barriers;

• Identify the barriers to the take-up of digital television for those consumers interested primarily in receiving the existing free-to-air public service broadcast channels (BBC1, BBC2, ITV, Channel 4/S4C and Channel 5), and identify steps that might be taken to remove these barriers;

• Identify the barriers for consumers to access to new services, and in particular to the internet, from digital TV receiving equipment and the steps that might be taken to remove these barriers.

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2. Market conditions

9. The principal market condition that would facilitate a rapid switchover is the availability of appropriate digital receiving equipment and a wide range of attractive digital services at affordable prices to persuade consumers to migrate to digital. In the view of the ITC, OFT and Oftel factors which will contribute to this include:

• Free-to-air public services available on a near-universal basis without purchasing tied subscription packages or other such conditions;

• Sufficient, high quality, diverse content available for both free-to-air and pay-TV subscribers;

• A sufficient range of new services available on each competing digital platform to encourage otherwise reluctant consumers to migrate to digital, and to enable consumer choice;

• Ease of accessing, and switching between, different digital pay television providers (or platforms) where the choice of services available may change over time;

• Ease of accessing the internet from a digital television receiver for those consumers who wish to do so, including both free-to-air viewers and pay-TV subscribers;

• Widespread use of "open" technical standards facilitating innovation in receiving equipment and ease of switching between different service providers;

• A range of simple straightforward equipment choices tailored to consumers’ demands, including equipment that could be adapted to receive additional services or follow migrating services and offer reasonable security against rapid obsolescence;

• Digital television receivers or set-top boxes readily available at a reasonable price for those unable or unwilling to subscribe to pay-TV;

• Greater information on digital television and new services to enable the consumer to feel confident about purchasing decisions – both in relation to services and receiving equipment; and

• Effective competition in relevant markets between platform providers, content providers and manufacturers.

10. We would welcome responses that address the following questions:

3. Impediments to these market conditions being in place

11. There are a number of real or perceived impediments that could work against the market conditions described above being in place and, hence, the achievement of Government’s aims. This section is grouped into broad categories of obstacles but should be viewed in light of the main aims of this consultation, as set out in paragraph 8 above.

Cost Barriers

12. Key to the issue of ensuring digital switchover will be the availability of digital TV to all sections of the community. The particular benefits through increased public information and educational opportunities should be provided for all. The aim of the Government to ensure that 95 per cent of the population have access to digital TV equipment that is affordable to people on fixed or low incomes before switchover will require special consideration.

13. For the switchover to be completed at the earliest possible opportunity, strategies to encourage take up must ensure that there is no ‘digital divide’ between those able and willing to take up the services and those who through cost and other factors are unable and/or unwilling to switch to digital. Recent research has shown that those most likely to have a digital TV subscription at present are young and in the highest bracket for household income, suggesting a divide between the ‘haves’ and ‘have-nots’ that is closely related to income and age.

14. Whilst this review is more concerned with market factors than social issues, it is important that the context of the review and the views of respondents give consideration to special measures that might have to be taken by Government or others to ensure that cost is not a major barrier. Any further information from respondents on the social structure of the market for digital TV would be welcomed.

15. Some forecasts suggest that as much as 40 to 50 per cent of the population will abstain from subscription to pay-TV altogether. For switchover to be feasible, it is important, therefore, that viewers whose interest is primarily in the free-to-air public service channels have a reasonable migration path to digital television.

16. Cost barriers might cover some of the following issues:

• The cost of open standard idTVs is prohibitively high for most consumers;

• In counter to this subsidised idTVs typically have compulsory subscription to either digital terrestrial or digital satellite services, with embedded technology that can be a disincentive to the consumer unwilling to make an early commitment to just one of the digital pay-TV platforms in a rapidly developing market;

• Lack of availability of a low price set-top box designed to deliver the free-to-air services (perhaps also providing internet access);

• Homes with more than one television set will incur added costs in replacing each set, or need to obtain a set-top box for each set if they are not to retain a combination of analogue and digital receivers;

• The cost and inconvenience of switching to the receiver configuration needed to access content on a different platform should the need arise. Switching between platforms could necessitate the acquisition of any of the following products: smart card, conditional access module, tuner-demodulator module, or new set-top box and related software, and the cancellation of existing subscription contracts which may be at a cost where subsidised equipment has been provided;

• An unwillingness or inability on the part of viewers to pay for television services.

Consumer Information

17. Consumers may suffer from a lack of information or confusing information about the options available to them through digital TV. Increased clarity about the products available and the capabilities and services offered would aid this process. Barriers in this area might include the following:

• A perceived need to subscribe to pay services, since digital receiving equipment is still very much associated with subscription. Consumers are not receiving a clear message that they can receive free-to-air services digitally, without having to subscribe to pay TV services;

• Consumer confusion about the different capabilities of the different systems on offer.

Technical Barriers

18. Many of the barriers faced by consumers may be as a result of the current stage of development of the technology available. These might also include a lack of incentive for manufacturers to develop certain products for the market at this stage. Some of the technological barriers might be short term but other long term barriers might be avoided by intervention by the regulators. Some of these barriers might include:

• Lack of availability of digital coverage for some platforms in some areas (where only satellite coverage exists, ITV and ITV2 would not currently be available digitally);

• The attractiveness for the consumer of an open standard idTV, a natural replacement product for existing analogue sets, is currently limited by the lack of availability of conditional access plug-in modules (CAMs) to enable reception of digital satellite or cable services without needing a separate set-top box. (ONdigital has developed such a module, due for launch in May, for digital terrestrial pay services);

• Lack of common technical standards, particularly in relation to conditional access and API operating systems. (At present the set-top box software and hardware technology used on the different platforms is incompatible);

• Lack of common technical standards between the internet and digital TV interactive services on different platforms;

• Lack of hardware and software features in some set-top boxes or digital TV sets to support access to the full internet;

• Awkwardness of user interface (e.g. keyboard) in the TV viewing environment and potential need for computer peripherals (e.g. printer, disc storage) to support some applications.

Ensuring Quality and Choice for Consumers

19. The UK has a wide range of high quality and diverse television services available and is one of the countries taking the lead in offering digital TV interactive services. Annex 2 describes some of the new services available only with digital television, and hence potentially offering powerful incentives for viewers to switch over from analogue.

20. In order to encourage viewers that digital TV can offer relevant and useful extra services, it will be important to ensure that consumers have a range of quality offerings and maximum choice to tailor their viewing to their individual preferences.

21. Just over 30 per cent of UK households currently receive multi-channel pay television. Although this number is growing, the rate of increase is relatively slow. This tends to suggest that many consumers are not convinced about the benefits of multi-channel television and are yet to be persuaded that the additional costs will bring concurrent additional benefits. The majority of consumers may feel that the current analogue terrestrial offering suits their needs and that there is a lack of compelling content on digital television.

22. Factors contributing to this inertia, and which act as a barrier to the take-up of digital pay-TV services, may include:

• Lack of a compelling proposition (programme, product or equipment) to persuade customers to switch from analogue to digital reception of free-to-air services;

• Perceived lack of quality or diversity in the content of digital pay services, particularly – but not exclusively – basic channels;

• Real or perceived lack of choice over the services available;

• The vertical integration of content providers and platform providers creating a lack of scope for consumers to "customise" preferences by taking services from a range of different content providers;

• Lack of familiarity with, or interest in, new services (including TV internet access) and confusion about how to obtain them.

Consultation Questions

23. The ITC, OFT and Oftel would welcome responses to the following questions:

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4. Consultation Details

24. Responses to this consultation should be received in electronic format by the ITC no later than the end of Friday 16 June 2000. Please address replies to:

Davina Garrod, Economic Regulation Division, ITC, 33 Foley Street, London, W1P 7LB. Fax: 020 7306 7800

or email. All responses will be copied by the ITC to Oftel and the OFT.

25. Please note that responses to this consultation will be made available on the ITC’s website for public scrutiny unless respondents make a special case for confidentiality. Respondents may prefer to put confidential material in a separate annex.

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Annex 1 - The Current Regulatory Framework

1. The Independent Television Commission exists to promote and safeguard the interests of all viewers of commercially funded television, whilst fostering a dynamic and innovative market place. Under its powers, derived from the Broadcasting Acts 1990 and 1996, the ITC issues licences that allow commercial television companies to broadcast (in either analogue or digital format) in and from the UK. These licences vary according to the type of service but all set out conditions on matters such as technical standards and standards in advertising and programming.

2. The ITC regulates these services by monitoring broadcasters’ performance against the requirements of the ITC’s published licences and codes and guidelines on programme content, advertising and sponsorship and technical performance. There is a range of penalties for failure to comply.

3. The ITC also has a duty to ensure that a wide range of television services is available throughout the UK and that, taken as a whole, these are of a high quality and appeal to a range of tastes and interests. The ITC has powers to ensure fair and effective competition in the delivery of these services and exercises this duty both independently and by working closely with other regulators including the Office of Fair Trading and the Office of Telecommunications.

4. The Office of Fair Trading plays a key role in protecting the economic welfare of consumers, and in enforcing United Kingdom competition policy. The OFT is responsible (sectoral regulators, including Oftel, have concurrent powers in their respective sectors) for applying and enforcing the provisions of the Competition Act 1998 in order to ensure that the competition process is unhindered by anti-competitive activity. The Competition Act replaced or amended existing competition legislation including the Restrictive Trade Practices Act 1976, the Resale Prices Act 1976 and the majority of the Competition Act 1980. The scale and complex monopoly provisions of the Fair Trading Act 1973 are retained, although it is envisaged that these will only be used where the Competition Act 1998 is inappropriate. The mergers regime remains unchanged at present.

5. The Competition Act contains two prohibitions: one of agreements (whether written or not) which prevent, restrict or distort competition and which may affect trade within the United Kingdom (the Chapter I prohibition); the other of conduct by undertakings which amounts to an abuse of a dominant position in a market and which may affect trade within the United Kingdom (the Chapter II prohibition). The prohibitions are modelled closely on Articles 81 and 82 of the EC Treaty.

6. Oftel has a responsibility to maintain and promote competition in Terrestrial Broadcast Transmission markets. Oftel also regulates certain aspects of access to UK digital television networks. This regulation stems from the Advanced Television Services Directive (Directive 95/47/EC). The key concept behind the Directive is that providers of conditional access should not be able to restrict competition in the broadcasting market by refusing a broadcaster supply of Conditional Access Services.

7. Oftel regulates operators who provide Conditional Access Services under the Conditional Access Class Licence. Conditional access is the technology by means of which access to Digital Television Services may be controlled, so that only those viewers who are authorised to receive such services do so.

8. Electronic Programme Guides (EPGs) are regulated jointly by Oftel and the ITC. EPGs enable digital TV viewers to find and select digital television programmes. EPGs constitute Conditional Access Services, therefore EPG operators must also make these services available to third parties on a fair, reasonable and non-discriminatory basis.

9. Oftel also has powers to regulate the provision of Access Control Services, and does so under the terms and conditions of the Access Control Class Licence. Access Control Services control the supply to end users of certain other digital services. These services could include, for example, broadcast interactive services like shopping and banking through the television set.

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Annex 2 - The current state of play with digital TV services and equipment

1. Access to digital television involves two elements: (1) availability of receiving equipment; and (2) availability of services. These are discussed in turn below.

(a) Equipment

2. There are three principal platforms through which digital television services can be accessed – digital terrestrial, digital satellite and digital cable. A fourth platform, ADSL, which uses existing telephone lines, is starting to become available and could reach as many as 25 per cent of homes and businesses during 2000. It offers the potential for delivering digital TV as well as other broadband services such as electronic shopping, video on demand and fast internet access.

3. At present digital television services can be accessed in the following ways:

• Consumers can buy an open standard integrated digital terrestrial television set (idTV) which gives access to a range of free-to-air television and digital text services. An additional plug-in conditional access module (CAM) will be required if the consumer wishes to view digital terrestrial pay services. ONdigital is currently developing such a module. The reception of digital satellite or cable would require the addition of the relevant set top box.

• Consumers can buy an idTV which incorporates the conditional access and interactive software used by either the digital satellite or digital terrestrial operators. Changing from one provider to the other would currently require the consumer to add the relevant set-top box .

• Consumers can attach a set-top box, available from one of the digital platform operators such as ONdigital, Sky Digital or a cable operator, to their existing television sets.

• In some areas ADSL allows consumers to access digital television services via existing telephone lines. BT is currently upgrading its local access network to provide an ADSL capability. Competitors will be able to provide ADSL services to end users over BT’s upgraded network. By 1 July 2001 at the latest, BT will be required to make available its local loops to competitors - "unbundled local loops" - who will be able to use ADSL or other DSL technologies to upgrade loops to broadband capability, thus introducing further competition.

(b) Services

4. Digital television allows for a substantial expansion of traditional broadcasting services, viz: information, education and entertainment, etc, bringing greater choice. Traditional services come also with new characteristics; for example, there is scope for narrowcasting with the wider range and diversity of services giving consumers greater freedom in deciding what they want to watch and when.

5. In addition to traditional television services, digital television offers the potential for a variety of new services, including broadcast multimedia and dedicated interactive services, as well as access to the internet. Many of these new services rely on the use of a return connection from the consumer back to the service provider, typically provided by a connection to a standard telephone line, or via a cable television network. The use of an online connection from the digital receiver back to the service provider opens up the possibility for internet access to be made available via the digital receiver.

6. A simple example of a broadcast multimedia service is digital teletext, which can combine text, graphics, pictures and video.

7. Examples of dedicated interactive services include:

• Impulse pay-per-view (i.e. pay-per-view television that includes a return communication channel for selection of, and payment authorisation for, a particular option via a menu on the TV screen);

• Video-on-demand, where the viewer can select and authorise payment for premium programming such as movies;

• Home shopping or banking services where the generic information is broadcast while personalised transactions are carried out online;

• Games or educational information broadcast or made available online;

• An enhanced TV service in which supporting information is broadcast alongside the main TV service, or links are provided to online supporting information; Another example of this type of interactivity is the ability to choose to view different camera angles of, say, a sports event, together with selected news and information.

8. Key characteristics that separate some of these new interactive or multimedia services from conventional (or traditional) free-to-air or pay television services is that they give greater control and choice to the viewer. However this may sometimes only be achieved through the use of different technical standards for their composition, and specific software might be needed in the digital receiver to access these services. In particular, the internal workings of the receiver will need to make use of a particular set of software interfaces (APIs – "Application Programming Interfaces") and as yet there is no common European or UK standard for this. Furthermore, it might not be possible to upgrade existing digital receivers to be able to access the full range of services that might become available from different operators.

9. Thus consumers who choose a particular receiver now might be locked into their existing supplier, and the range of services offered by him, and would be unable to transfer to another supplier should they have a preferred offering, either now or in the future. Barriers to switching between suppliers may be detrimental to the effective operation of the market, and, hence, the development of digital television.

10. Access to the internet via a digital television receiver does not necessarily imply the provision of any new services via the digital television delivery system. For example, such access could be provided by simply combining web-browsing software (with modem and telephone line connection) with a digital television decoder in the same set-top box or digital television set. Manufactures of such web-browsing STBs will need to incorporate software that will format the internet content so that it is suitable viewing via a television screen.

11. Other new services are also likely to be introduced as the technology and the market develop. For example there will be services designed to manage hard disk storage in future digital receivers, enabling customised recording of programmes and data without the need for videotapes or for complex user interaction.

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Footnotes

¹This consultation document is available at http://www.oftel.gov.uk/superhwy/ecom0400.htm and can be downloaded from http://www.oft.gov.uk/html/new/e-commerce.htm.

² The Government is currently working with industry on the information needed to increase awareness about digital television.

³ An open standard idTV is a digital TV set without any proprietary conditional access technology built into it. It can receive the free-to-air digital terrestrial services without modification.

⁴ The Secretary of State for Culture, Media and Sport, Chris Smith, made it clear that "for those who want to subscribe to pay services – and digital provides a real opportunity for the growth of new pay TV services - it must be easy to switch between different platforms." This ability to have content transmitted and received across different digital TV platforms is also known as inter-platform interoperability.

⁵ The ITC has prepared, in co-operation with the BBC, the frequency plan for the six UK DTT multiplexes, and is now actively involved with the multiplex and transmission operators in further planning to improve coverage.

⁶ For example, Sky Sports Extra covers football matches, amongst other sporting events, and gives viewers access to information about the teams and players, as well enabling them to view matches from different camera angles.

⁷ The specification of a Multimedia Home Platform (MHP) has recently been completed by the European DVB group. This will enable manufacturers to build interoperable equipment that viewers could use to receive a wide range of television and interactive multimedia services supplied by various operators. Ultimately, the MHP is intended to be able to connect to other consumer equipment and to form part of an in-home digital network.