1.  The Independent Television Commission (ITC) and the Office for Telecommunications (Oftel) have investigated a complaint made by BSkyB to the ITC about some aspects of the way in which cable operators bundle retail telephony and television services. After careful consideration of the responses to a consultation document issued in April 1999 (joint news release 26/99) and the attached paper by Europe Economics, the ITC and Oftel have provisionally concluded that the complaint should not be upheld. They are publishing the findings from the investigation and inviting comments by Tuesday 29 February before taking a final decision.

PROVISIONAL CONCLUSIONS

2.  The ITC and Oftel have provisionally concluded that at this time there is no basis on which to take action against the cable operators in relation to the practices or pricing of bundled telephony and television services. They intend, however, to keep the situation under review and will revisit the issue should market conditions change materially.

BACKGROUND

The Complaint

3.  The case arose from a complaint made by BSkyB to the ITC about the way in which cable operators bundle retail telephony and television services. The specific complaints were:

1. that cable operators are unduly pressing consumers to take a bundled package of both telephony and television and are either refusing to provide separate services at less than the cost of the bundled package, or are putting obstacles in the path of the single service options; and
2. that the prices of mixed bundles are lower than can be justified on the basis of cable operators’ costs.

The Inquiry

4.  As part of the inquiry the ITC commissioned a firm of consultants, Europe Economics, to analyse the responses to the consultation paper. These responses, less any confidential material, have been placed in the ITC library, where they are available for public inspection. The ITC and Oftel, whilst not necessarily endorsing each and every point made in the report agree with the conclusions and propose on that basis to reject the complaint.

The Issues

5.  The consultation paper identified two practices that might have anti-competitive effects when conducted by persons having market power:

• a refusal to supply either telephony or television separately where the services are sold as a bundle; and
• the offer of telephony and/or television at prices less than the costs directly attributable to the relevant service.

6.  The investigation of this case followed the usual pattern of a competition analysis involving the following set of issues:

• What are the relevant markets?
• Do the cable operators have market power in any relevant market?
• Does the cable operators’ behaviour amount to an abuse of market power?
• Are the issues such as to involve a significant distortion of the competitive market place and detriment to consumers?

The relevant markets

7.  There are two issues here, the range of services to be included and the geographical extent of the relevant markets. It is concluded for the purposes of this case that:

1. telephony and television services are separate markets; and
2. the relevant television market is the market for pay television.

8.  So far as the geographical markets are concerned, arguments can be advanced either that the relevant markets in this case are national, or that there are relevant local markets. In broadcasting satellite services are available nationally, but cable – in terms of homes passed and thereby with a service available – is not. In investigating a complaint against cable companies, it seems natural to consider the local markets defined by the areas served by the cable companies. This could imply that the relevant markets are local.

9.  However, the services of BSkyB and ONdigital are priced on a uniform national basis. While each cable company only competes directly against BSkyB and ONdigital, the uniform tariffs of the national operators have the consequence that, if one cable company reduces its prices in such a way that the national operators are obliged to reduce their prices, the other cable companies may in turn be obliged to reduce their prices. This could imply that the relevant market is national.

10.  The arguments concerning the geographic coverage of the relevant telephony market are similar to those for the pay television market. The ITC and Oftel have conducted their investigation on the basis of:

1. the local markets defined by the areas served by the cable companies; and
2. the national markets

being the relevant markets. Their conclusions are the same whichever geographical definition is adopted. Accordingly, it has not been necessary for the purposes of this investigation to make any definitive finding on the appropriate geographical definition of the relevant markets.

Market power

11.  Regulatory action would potentially be justified if it were established that the cable operators had market power and that they were engaged in an anti-competitive practice. Bundling of two services is of concern as a potential means of leveraging market power from one market to another. So, market power in telephony is relevant in assessing whether the pricing of services by the cable companies has an anti-competitive effect on the pay television market and vice versa.

12.  It is generally accepted that the cable operators do not have market power in relation to telephony. While it is true that certain types of telephone call are currently priced above cost, the resulting profit opportunity is open to anyone who wishes to enter the calls markets using BT’s network to originate calls. Cable companies originate calls on their own access network infrastructure, but under current tariffing arrangements this does not increase their profitability relative to suppliers who use BT’s network for call origination. Cable operators do not have market power, or a unique profit earning ability in telephony. This conclusion holds on the basis of either local or national market definitions for telephony.

13.  There is more concern that cable operators may have market power in pay television. On a national market definition this seems unlikely. However, if the market is assessed using a sub-national definition, cable market shares, which in some cases are up to 80 per cent, suggest that they might have market power. BSkyB have been found in previous competition investigations to have a considerable degree of market power in the wholesale market for the supply of premium pay services (sport and film). BSkyB’s wholesale market power and significant presence in the retail market would tend to reduce the extent of any market power enjoyed by cable operators.

14.  A variety of views on the question of market power were expressed in the responses to the consultation document. In order to ensure a full investigation of the complaint, the ITC and Oftel consider it appropriate to assess whether the practices of the cable companies would be of concern if they did have market power in pay television. The practices which would be of concern if cable companies had market power in pay television would be:

1. excessive pricing of pay television services;
2. pricing of pay television services, or bundles of services of which pay television was a part, at an uneconomic level with a view to expanding their market position in the pay television market; and
3. leverage of market power from pay television into other markets, for example by a refusal to supply pay television services independently of other services

15.  The tests to ensure that the cable companies were not engaged in these practices would be:

1. the price of pay television services should be below stand alone cost;
2. the price of pay television services provided separately and bundles including pay television should be above incremental cost; and
3. pay television should be available as a separate service, and the price of a bundle including services other than pay television should exceed the price of pay television on its own by an amount at least equal to the incremental cost of those other services;
4. consumers should be made aware of both separate and bundled options.

16.  The position in relation to each of these tests is the following:

1. there has been no suggestion that cable companies are supplying pay television or bundles including pay television at prices above stand alone cost;
2. the price and cost data that the ITC and Oftel have examined suggest that cable operators are pricing pay television, and also bundles including pay television, at a level above incremental cost;
3. there is no reason to believe that cable companies have the ability or intention to leverage any market power from pay television into telephony, to engage in anti-competitive conduct against BT. But, in any event, the cable operators do supply television services separately and the price and cost data examined by the ITC and Oftel suggest that, when they supply telephony as well as television, the additional charges for telephony services (including calls) cover the incremental cost of those services;
4. the ITC and Oftel would like to see the cable companies ensure a greater awareness by consumers of the separate options.

17.  Paragraph 12 sets out the ITC’s and Oftel’s view that cable companies do not have market power in the market for telephony. There is therefore no concern about cable companies’ prices for telephony services and bundles including telephony services from the perspective of any abuse of market power in telephony. Nor is there any concern about the leveraging of market power from telephony into other markets such as pay television, because there is no market power to leverage.

Conclusion

18.  The conclusion of this inquiry is that, at present, the evidence does not support the proposition that cable companies are engaged in any practices which would constitute an abuse of market power. This is because the cable companies do not have market power in telephony, and even if they did have market power in pay television, none of their current bundling practices would constitute an abuse of market power.

Resolution of complaint

19.  For the reasons above, ITC and Oftel consider that there are presently no grounds to take action to require cable operators to change their tariffs or to unbundle television and telephony. However, ITC and Oftel propose to keep these markets under review, in the light of the possibility that market power could develop.

Transparency

20.  The available information indicates that the cable operators are not refusing to supply telephony and television services separately and that at least some customers are exercising the separate options. However, as noted in paragraph 16(iv) above, cable companies could do more to make customers aware that they are able to subscribe to the telephony and television services separately if they so choose. The ITC and Oftel consider that the cable companies should make the choice and pricing of the various services available to customers more transparent.

21.  Comments on these provisional conclusions should be submitted by 29 February 2000 to either the ITC or Oftel at the following address:

Mike Kidd, ITC, 33 Foley Street, London, W1P 7LB, email: kidd.m@itc.org.uk
Jim Niblett, Oftel,  50 Ludgate Hill, London, EC4M 7JJ, email: jim.niblett@oftel.gsi.gov.uk

22.  All responses will be made publicly available unless respondents seek confidentiality for all or part of their submissions. Responses to the full consultation announced in April 1999 (see News Release 26/99) are still available in the ITC Library for viewing from 12.30pm weekdays.

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