Open access: Delivering effective competition
in communications markets

April 2001

Contents

Summary

Chapter 1 Introduction

Chapter 2 Framework for imposing open access

Chapter 3 Open access to cable networks

Chapter 4 The need for open access regulation in future

Annex A Application of framework to cable operators

Annex B The regulatory framework for open access



Annex C Market information

            

Glossary of terms 

S.1 Open access regulation enables companies to provide communications services using the networks, services or facilities of another operator. Providers of communications services without networks of their own need access to, or interconnection with, communications networks and associated services and facilities. Providers with networks may need access to offer services beyond the reach of their own networks. This statement describes the tests which Oftel will use in considering whether to regulate to require open access in order to promote effective competition in the markets for which it has responsibility. The statement also presents Oftel's conclusion on the application of these tests to cable operators. The conclusion reached is that regulation to require open access to cable networks is not currently justified.

S.2 Oftel believes effective competition in the provision of communications services is the single most important means of ensuring consumers obtain the best possible deal in terms of choice, quality and value for money. Where competition is effective, market forces should encourage network and facility operators to offer access on reasonable terms without the need for regulatory intervention.

S.3 But sometimes market forces alone are insufficient to deliver effective competition. In those cases, regulatory intervention may be justified to promote competition. Oftel will monitor the level of competition closely and will take prompt and proportionate action where there is evidence that competitive forces are not delivering the best deal for consumers.

S.4 Oftel believes that regulation should be appropriate to the extent of competition and focused on the area of concern; otherwise there is the danger of imposing regulation where none is justified. Unnecessary, unjustified open access rules could undermine competition by reducing the incentive to invest and innovate which would be damaging to consumers.

S.5 Regular reviews of market sectors will play an important role in ensuring that the level of regulation remains appropriate. The communications sector is developing rapidly. As competition increases, communications markets will need less – but more focused – regulation.

S.6 Both the level and instruments of regulation need to be proportionate. Some respondents suggested structural separation to tackle and remove vertical integration where this distorts competition. Oftel believes this is unlikely to be a proportionate regulatory response in many cases. Vertical integration can bring consumer benefits by speeding innovation. Well-established regulatory methods – including open access obligations on non-discriminatory terms – are more likely to be the proportionate response where there are concerns about the foreclosing of competition resulting from the combination of vertical integration and market power.

S.7 In order to ensure open access is only imposed when necessary to promote effective competition, Oftel believes that three specific tests need to be satisfied:

• the operator of the network or facility in question possesses market power in the relevant market;
• the expected benefits from mandating open access should exceed the costs; and,
• open access is the most effective and proportionate measure available.

S.8 Oftel will use these tests in considering whether to impose new open access obligations for competition reasons, using its existing legal powers. It will also use these tests to decide whether to renew, extend, or withdraw existing open access regulation, to the extent it has the discretion to do so.

S.9 The consultation document, Open access to communications networks: Ensuring competition in the provision of services, published in April 2000, initially described Oftel's proposed framework for open access. Oftel sought the views of interested parties on all aspects of this consultation document and would like to thank all those who participated in the consultation process. This statement responds to some of the points raised during this process.

S.10 The consultation document also applied the tests for opening access to cable operators and concluded that they should not be obliged to supply open access to their networks as they lacked market power. Respondents were also asked to comment on this provisional conclusion. Having considered these comments, Oftel confirms its preliminary view that cable operators do not possess market power in the relevant markets. Hence, regulation to require open access to cable networks is not necessary at present. Companies are free however to agree commercial terms for access to cable networks, and competition will help ensure these terms are reasonable.

S.11 As well as being used to promote effective competition, open access obligations may also be appropriate for public policy reasons, eg to ensure universal availability of public service broadcasting. Such public policy goals do not fall within the remit of this statement, however, which considers the question of open access for competition reasons only. Oftel will, however, continue to work closely with other regulators, the Independent Television Commission (ITC) in particular, to ensure a coherent approach to regulation.

• Obligations on operators of telephone networks to interconnect with other network operators.

• Obligations on telecoms operators to offer access to their networks to third-party service providers who wish to provide telephony to consumers.
  

• Obligations on digital TV platforms to offer access to their encryption systems to third-party broadcasters, thereby allowing those broadcasters to supply their TV channels to consumers.

• AOL Europe
  
• BBC
  
• BSkyB
  
• BT
  
• Cable and Wireless
  
• Centrica
  
• Open Interactive Limited
  
• Northern Ireland Advisory Committee on Telecommunications
  
• NTL
  
• Telewest
  
• Scottish Advisory Committee on Telecommunications
  

• Chapter 2 describes the process by which open access obligations may be imposed by Oftel in the future;
  
• Chapter 3 presents conclusions on the issue of open access to cable networks;
  
• Chapter 4 discusses whether any new open access obligations will be necessary;
  
• Annex A discusses some of the points raised in response to the framework for open access set out in the consultation document;
  
• Annex B discusses the points raised in response to the consultation document's provisional conclusions on cable operators;
  
• Annex C provides an update of some of market share figures given in the consultation document.

• effective competition exists in the market segment under review;
  
• effective competition is in prospect; or,
  
• effective competition is not yet in prospect.
  

• identify why this is the case;
  
• focus on where action is needed to improve the level of competition in the market; and,
  
• consider if active promotion of competition is appropriate and, if so, through what policy instruments.
  

2.17 Not only is it necessary to determine whether regulation to promote competition is necessary at all therefore, it is also important to consider the type of regulation used, and impose the most appropriate form of regulation.

Three tests for opening access

2.18 In deciding whether or not open access was the most appropriate form of regulation, there are three important issues to consider:

1: Does the operator in question possess market power in the relevant market?

2: Do the expected benefits of open access exceed the costs?

3: Is open access the most effective and proportionate measure available?

2.19 Oftel would assess these issues through competition analysis and cost-benefit analysis. Some of the specific aspects of these three issues are discussed in greater detail below.

Market power

2.20 Regulation to promote competition, such as open access, would only be imposed on operators who are able to harm consumers by restricting or distorting competition. Firms without market power are unable to do so. Imposing open access on operators without market power therefore brings no significant improvements to the state of competition and is inappropriate, unless other public policy concerns apply.

2.21 Market power is described in the Competition Act guidelines, Assessment of Market Power, as "a situation where the constraints which would usually ensure that an undertaking behaves in a competitive manner are not working effectively." The guidelines also describe examples of how market power may manifest itself. These include the ability to raise prices consistently and profitably above competitive levels, the ability to supply goods of a lower quality or the ability to restrict output to a lower level than would be supplied in a competitive environment.

2.22 When gauging market power, Oftel will apply the same methodology as other authorities with competition responsibilities. See the Competition Act guidelines, Market definition and Assessment of market power, for further details. Also relevant are the Competition Act guidelines, The application in the telecommunications sector and Oftel's Guidelines on Market Influence determinations, March 2000.

2.23 In cases where the appropriateness of existing open access rules was being assessed, operators with market power are likely to have been identified as part of the relevant effective competition review. The implication of the absence of effective competition is the presence of one or more operators with market power.

2.24 Firms with market power may not necessarily be able act in ways which give rise to enduring distortion or restriction of competition, eg if the relevant market was prospectively competitive. If distortion or restriction of competition was likely, however, Oftel would examine whether the benefits of regulation exceeded the costs, and consider the proportionality of different types of regulation.

Costs, benefits and proportionality of regulation

2.25 A cost-benefit analysis is a useful means of identifying the various policy options available and weighing up the pros and cons of each one. Oftel's guidelines for assessing the costs and benefits of regulatory action were published in April 2000 as part of the Proposals for implementing Oftel's Strategy: 2000/01 Management Plan. The guidelines explain in detail how Oftel would undertake a cost-benefit analysis. Some of the specific costs and benefits which might result from open access, and the situations where open access might be the most proportionate form of regulation, are discussed further below.

2.26 In assessing the benefits of open access, the emphasis would be on the benefits for consumers, because the aim of regulating would be to promote effective competition, not to safeguard the interests of any particular competitor. The benefits for consumers might include greater choice of services, more innovation and lower prices.

2.27 Mandating open access could lead to a number of costs being incurred. Perhaps most importantly, requiring open access can reduce incentives to invest and innovate by raising the risk (at the margin) that the costs involved in these activities will not be fully recovered. It may also increase the cost of raising capital for the operator concerned which could hinder investment. The cost of this incentive effect is likely to be greater in new and rapidly developing communications markets which are characterised by high levels of innovation and investment, than in more established communications markets. If open access to a particular network were to hamper investment and innovation then consumers could ultimately encounter less choice of services and face higher prices.

2.28 Open access could also lead to other costs, such as damaging competition in related markets. For example, although open access to some broadcasting networks may promote competition in the retail pay TV market, it could have a detrimental effect on competition in the wholesale pay TV market. If this were to happen, the net benefits to consumers of mandating open access could be put at risk. Oftel would, therefore, aim to examine the effects on competition in all the markets it believed to be relevant.

2.29 Operators also face a cost in complying with regulation. To be effective, guaranteed rights of access often need to be accompanied by rules which prevent undue discrimination, margin squeezes and other behaviour which distorts competition. Such regulation requires compilation and analysis of a large quantity of information. Clearly this can be very costly and would not be justified where the benefits of regulation were marginal.

2.30 In circumstances where several regulatory remedies are available as a response to an identified competition problem, a cost-benefit analysis would also assess the costs and benefits of the various policy options available, with the aim of ensuring that the policy chosen was the most effective and proportionate. As well as ensuring that the benefits of measures such as open access exceed the costs, it is also important that the measure chosen is the option which brings about the greater net benefit.

2.31 In general terms, open access is most likely to be suitable where an operator of a communications network or facility is in a position to use its control of that network or facility to distort or restrict competition in a related market for communications services. Such behaviour is more likely when the operator is also active in the related market, ie when it is vertically-integrated. Vertical integration can benefit consumers (eg, by making it easier to launch new services) but it can also cause competition concerns. For example, a vertically-integrated operator of a pay TV platform with market power may be in a position to prevent effective competition by denying access to broadcasters whose channels compete with its own. Open access to the relevant broadcasting platform could be used to promote effective competition in such cases. The effects of vertical integration are discussed in more detail in Chapter 4.

Chapter 3

Open access to cable networks

3.1 The particular issue of open access to cable networks was considered in the consultation document as a result of concerns expressed that the current arrangements were proving a barrier to effective competition. Although the exercise was not formally conducted as an effective competition review it was conducted in a broadly equivalent manner, and the ultimate purpose was the same: to determine whether regulation is appropriate or not.

3.2 The consultation document applied the proposed tests for open access to cable operators and considered whether any of them had market power in the provision of TV, telephony, higher bandwidth services and interactive services. After a careful consideration of the available evidence, Oftel concluded that none of the cable operators possessed market power in the relevant markets. For this reason, the provisional conclusion was that regulatory intervention to require open access to cable networks was not necessary at present.

3.3 Comments received during the consultation process have not altered Oftel's view that none of the major cable operators have market power in the UK markets for telephony, pay TV, higher bandwidth services and interactive TV services. Nor does Oftel believe it is necessary to impose open access at this stage to prevent any possible distortions to competition caused by asymmetrical regulation (see Annex A). Imposing open access to cable networks would not therefore be appropriate regulatory action. Some of the points raised by respondents in relation to open access to cable networks are discussed in Annex B.

3.4 As discussed in more detail in the next chapter, competition in communications markets is likely to increase in the years ahead. Some of the developments relevant to cable operators are considered in greater detail below.

Pay TV

3.5 It was stated in the consultation document that there were significant barriers to entry into the retail pay TV market. The only significant new entrant in recent years has been ONdigital which operates a digital terrestrial TV platform. But these barriers are not insuperable and it is likely that there will be an increase in the number of pay TV platform operators in coming years. In the UK, three-quarters of consumers can choose between at least two different pay TV providers. In areas in which cable operators have currently built out their networks, there may be three different competing pay TV platforms.

3.6 Some consumers are already able to obtain pay TV services through digital subscriber line technology and in future, it may become possible to access pay TV services through wireless access technologies. New developments may also have an impact on the definition of a market for pay TV itself. For instance, the increase in the number of free-to-air TV channels, combined with video-on-demand and video streaming through the Internet may all mean that the definition of a distinct pay TV market becomes outmoded at some point in the future. If so, it is less likely that any operator of a particular pay TV platform will have market power.

Telephony

3.7 Developments in fixed telephony markets are also increasing the scope for competition. For instance, although mobile and fixed telephony markets remain separate, there is increasing substitution of one for the other. Also, developments such as carrier pre-selection and local loop unbundling will make it easier for new firms to enter the market. There is also a possibility that more voice telephony will, in future, be carried over the public Internet, and over Internet protocol networks more generally. The pace of these various developments remains uncertain, however, and for the moment BT retains a strong position in telephony markets (see Oftel's publication, Price control review – Consultation, October 2000)

Higher bandwidth services

3.8 The provision of higher bandwidth services through telephone lines using digital subscriber line (DSL) technology will constrain the ability of cable operators to price their higher bandwidth services above the competitive level. In addition, the launch of wireless access services is likely to add to competition in the market.

3.9 Extensive measures have therefore been taken to promote competition in higher bandwidth services. Future market developments should assist in intensifying competition. Since cable operators lack market power in relevant markets at present, regulation to require open access to cable networks is not currently appropriate.

Interactive TV services

3.10 The consultation document noted that cable operators were in the very early stages of offering interactive services such as home shopping through the TV and concluded that it was not necessary to mandate open access for interactive services at this stage. Given the limited availability of interactive TV services on cable networks, Oftel believes that cable operators continue to lack market power in providing access to interactive services.

3.11 As with TV, it may well be the case that cable operators are required to provide access for interactive services through the pressure of competition. If consumers find interactive services useful they may well switch between competing platforms in order to obtain a better range of them. The costs of switching between platforms are currently minimal given the availability of free set top boxes from platform operators. One of the cable operators provided evidence which suggested that some consumers are already willing to switch between platforms because of the availability of interactive TV services.

3.12 Oftel will consider whether platform operators have market power in providing access to interactive service providers as part of its effective competition review in the market for Access Control Services (which control the supply to end-users of certain digital services, including interactive TV services). This review is scheduled to begin in January 2002.

Chapter 4

The need for open access regulation in future

4.1 The developments in the markets for pay TV, telephony, higher bandwidth services and interactive services described in the previous chapter illustrate a more general point: technological developments are making it less likely that any operator in communications markets will possess market power indefinitely. There are good reasons to believe that the convergence between the telecoms, broadcasting and information technology industries will increase competition as an increasingly diverse range of networks, both fixed and wireless, are able to carry the same broad mix of services. This points to less need for regulation. On the other hand, if there is greater market concentration, eg through consolidation of major industry players, then that might point in the other direction.

4.2 Convergence will affect sector-specific regulation in two distinct ways. Firstly, it makes the task of defining appropriate markets an increasingly specialised task. Defining the appropriate market is a crucial step in assessing whether there is effective competition, and whether any player has market power. Convergence may mean that markets become broader than has been the case hitherto. For example, radio and TV sent through the Internet may in time come to be regarded as belonging in the same market as broadcast radio and TV. But such market-widening depends on consumers being prepared to switch readily between different technologies, ie the switching costs have to be low. This can only be assessed on a case-by-case basis.

4.3 Perhaps most importantly of all, convergence breaks down the barriers to effective competition. The proliferation of different communications platforms, coupled with the increasing similarity between the services offered on different platforms, restricts the possibilities for any single operator to hold market power. For instance, new technologies such as digitalisation, high-speed Internet access, video-on-demand, web-based television and the next generation of personal video recorders may all help transfer power from platform operators to consumers.

4.4 Markets which are effectively competitive do not require sector-specific regulation to promote competition. If consumers are able to exercise choice effectively then sector-specific regulation to determine the choices they have available would be unnecessary for competition reasons. Extending open access to new technologies could also be self-defeating: making it less likely they will appear in the first place, as regulation could reduce the incentive to invest and innovate in these new technologies.

4.5 It is for this reason that Oftel has committed itself to regular reviews to ensure whether or not regulation is appropriate. Appropriate regulation means regulation should be adjusted to the level of competition in the market and focused on the area of concern.

The effect of vertical integration

4.6 One area of concern mentioned by some commentators has been the growing trend towards vertical integration in the communications sector, ie the combining of content and carriage. Vertical integration can create benefits for consumers by, for example, making it easier to launch new services, thereby speeding innovation.

4.7 But vertical integration can create incentives for an operator of a communications network or facility to inhibit competition, by, for example, discriminating in favour of its own content. Vertical integration also means that market power in one market can be transferred, or leveraged, into an adjacent market, either lower down or further up the supply chain.

4.8 Figure One outlines the supply chain for pay TV. The main retailers of pay TV services are essentially the platform operators, such as BSkyB, ONdigital and individual cable companies. Above that level are the wholesalers or channel providers. At the next highest level are the programme makers, who in some cases (such as sports and movie programming) need to purchase particular rights from the relevant rights holders.

Figure One: The pay-TV supply chain

4.9 An example of leveraging of market power is a vertically integrated wholesaler of TV channels, with its own retail arm, which charges excessive prices for its wholesale TV channels to other retail platforms. This could have the effect of damaging competition in the retail market.

4.10 Leveraging of market power in the other direction is also possible. For example, a vertically-integrated operator of a broadcasting platform which has a strong position in the retail provision of pay TV may be able to use that position to prevent other broadcasters from gaining access to the platform. It could do this if its market power in retail pay TV also gave it market power in the supply of conditional access services (such as encryption). If this were to be the case, the strong position in the supply of conditional access services could be used to create a strong position in the wholesale market. It could also be leveraged further upstream and used to stifle competition in bidding for programming rights.

4.11 It is also possible to leverage market power horizontally, ie firms can use a strong market position in one market to create or enhance market power in other markets at the same stage of the value chain. For example, a strong position in pay TV could be used to create a strong position in the provision of interactive TV, by practices such as bundling.

The role of open access regulation

4.12 If vertically-integrated firms with market power are able to foreclose competition then this could mean that the likely benefits to consumers of convergence do not materialise.

4.13 Some commentators have suggested that a means of addressing such competition concerns is to prevent the creation of vertically-integrated companies, and thereby forcibly separate content and carriage markets. In some cases, vertical integration enacted through merger and acquisition may be adjudged to be against the public interest. But Oftel believes an all-encompassing prevention of vertical integration would be unjustified, since it may hamper innovation in new services, damage competition across different platforms and hinder UK firms competing in world markets.

4.14 Rather than precluding vertical integration altogether, it is more appropriate to address any competition concerns through action by the sectoral regulator – not least, because vertical integration will only have competition implications if there is market power at one or more stages of the supply chain (see Annex A).

4.15 The potential problems which might emerge when vertically-integrated operators have market power are not new. More importantly, the solutions to such problems are well-established. For instance, BT is subject to obligations relating to the provision of access to its network on non-discriminatory terms. These obligations help prevent market power in one market from being leveraged into another market.

4.16 Concerns about the market power of pay TV operators can be handled in the same way: an operator with market power in the wholesale pay TV market and with a downstream retail operation of its own can be made subject to obligations which govern the supply of TV channels to its retail competitors. Open access obligations which allow competing pay TV channels to gain access to the platform may also be necessary.

4.17 These examples underline a more general point: accelerating convergence and growing vertical integration make it necessary for those undertaking competition assessment to adapt. As competition increases, communications markets will need less – but more focused – regulation. Established principles relating to competition analysis and regulatory action are, however, able to deal with the complex issues involved. But these principles need to be applied by an effective regulator, equipped with the powers to implement suitable remedies when necessary.

4.18 The new EC regulatory framework, currently under negotiation, will assist in achieving this. Oftel will seek to align its regulatory approach with the new EC framework once it is agreed. The Government's White Paper, A new future for communications, also supports the focus on targeted regulation and sets out a clear institutional framework for its future delivery in the UK.

• The extent to which XYZ's programming was valued by consumers.
  
• The availability of alternative broadcasting platforms.
  
• The ability of Platco's subscribers to switch to alternative platform operators.
  

• XYZ's programming was not particularly valued by consumers.
  
• Alternative broadcasting platforms were not available or were only available to a limited extent.
  
• Obstacles existed which hindered Platco's subscribers' ability to switch to alternative platform operators.
  

A.11 If point (i) above were true than the loss to consumer welfare from denial of access would be minimal. More serious cause for intervention would arise if either or both points (ii) or (iii) were true. If this were the case then Platco would be able to deny consumers access to XYZ even though it was highly-valued.

A.12 The extent to which points (ii) and (iii) are true are factors determining whether Platco has market power in the conditional access and retail pay TV markets. Thus the conditions necessary for a platform operator to deny its subscribers a service which they value are also the conditions under which that operator would have market power.

A.13 The implication of this analysis for open access regulation is worth highlighting: unless an operator possesses market power, the imposition of open access to promote competition is not necessary.

A.14 Although the possession of market power is necessary to justify the imposition of open access for competition reasons, it is not sufficient. Imposing open access in situations where the costs exceeded the benefits, for instance, would be contrary to consumer interests. It is also necessary to ensure that open access is the most effective and proportionate means of overcoming the relevant obstacle to effective competition.

A.15 One respondent suggested that the first step before mandating open access should be to remove barriers to entry into a particular market and thereby encourage competition between different platforms. As a general rule, the greater the number of platforms, the more vigorous competition for end-user services is likely to be. However, in practice, barriers to the launch of new platforms may well be high. Even where the regulator is in a position to lower some of those barriers, the resulting competition benefit is unlikely to be felt quickly.

Diversity and plurality

A.16 Some respondents suggested that a guaranteed right of access to all platforms for content providers is necessary to secure a plurality of opinions and content. Such diversity can emerge without any need for specific regulation. The proliferation of communications platforms, coupled with greater capacity on each as a result of digitalisation, is likely to increase the range of services available and thereby stimulate diversity and plurality of views without any need for open access regulation – provided there is effective competition in the market.

A.17 Effective competition will encourage network and facility operators to offer access on reasonable terms without the need for regulatory intervention. For example, competition between broadcasting platforms, combined with the importance to consumers of a wide range of available content, means that there is competitive pressure on broadcasting platform operators to offer a diverse range of TV channels. If effective competition does not emerge, however, open access obligations might be appropriate.

A.18 Open access obligations may also be appropriate even where effective competition is in place, eg to guarantee universal reach of public service content. Such public policy goals, however, are beyond the scope of this statement which concentrates on open access for competition reasons.

Asymmetrical regulation

A.19 Oftel believes that regulation should be proportionate. In particular, firms with a greater degree of market power should, in general, be subject to a greater degree of regulation than firms with a lesser degree of market power. The fact that different regulatory obligations may be imposed on different operators is not, therefore, a concern in itself.

A.20 Where it might be a concern is if asymmetrical regulation itself was the cause of distortions in the market. This can only be judged on a case-by-case basis, and is considered in the specific context of cable networks in Annex B.

A.21 It was suggested by some respondents that asymmetrical rights of access could hinder the launch of new services because these services would not have a guaranteed right of access to all platforms. Although such a possibility could arise, the relevant question is whether regulation is necessary to reduce this risk by guaranteeing a right of access or whether it can be resolved through commercial negotiation in the competitive environment. Oftel believes that unless market power exists, regulation to reduce any such risk is unnecessary.

Need for ex-ante open access requirements

A.22 Some respondents urged that open access obligations should only be imposed as an ex-post measure after an operator had been found to be in violation of Chapter II of the Competition Act 1998 which prohibits abuse of a dominant position (see the Competition Act guidelines, The Chapter II prohibition, for a definition of dominant position and descriptions of possible abuses).

A.23 As discussed in Chapter 1 of this statement, effective competition in communications markets has been hard to achieve for a number of reasons. The Competition Act 1998 may not be sufficient in all cases to achieve effective competition, eg in cases where firms possess market power but are not in a position of individual dominance.

A.24 It is possible that the concept of 'collective dominance' may evolve to the extent that it is possible to use general competition law to prevent anti-competitive behaviour by operators that have market power, but are not individually dominant. The Chapter II prohibition in the Competition Act 1998 prohibits conduct on the part of one or more undertakings which amounts to the abuse of a dominant position. Undertakings may therefore be dominant collectively. Case law in this area, however, is currently limited. In order to secure the best possible deal for the consumer, therefore, it is necessary to consider ex-ante regulation for undertakings which cannot, at present (given the state of jurisprudence) be shown to have a dominant position but nevertheless possess market power.

Use of 'market power' trigger

A.25 Some respondents questioned the use of a market power trigger below the level of dominance. Some commented that it was not possible to possess a level of market power below that of a dominant position; others said that it was not necessary to regulate firms which were not individually in a dominant position.

A.26 These particular issues were considered in detail during consultations which preceded the publication of Oftel's Guidelines on Market Influence determinations (March 2000). The guidelines state that there is a continuum of market power, with firms lacking market power at one end and firms in a dominant position at the other. As discussed in paragraph A.24 above, it may be necessary to consider ex-ante regulations for undertakings who possess market power but are not in a position of individual dominance.

A.27 Some respondents argued that using individual dominance as the trigger for action would provide a greater degree of regulatory certainty since individual dominance is a well-established concept in case law. Oftel believes that the Guidelines on Market Influence determinations provide a useful guide to how Oftel will assess whether market power exists in cases where an operator does not individually possess a dominant position. This will provide a good degree of regulatory certainty in practice.

A.28 Some respondents pointed out that the draft directives published by the European Commission had largely restricted the use of open access obligations to firms with significant market power (SMP) in the relevant market, with SMP being defined as holding a dominant position, either singly or jointly. Respondents also argued that Oftel should apply the same threshold for open access, ie dominance.

A.29 It should be remembered, however, that the draft directives are the subject of negotiation and alteration, and in any case they are unlikely to come into force until 2002 at the earliest, once the texts are finalised. Oftel will, at that point, decide whether it is necessary to revise the framework for open access to incorporate the alterations to the EC regime. But for the moment Oftel believes that to do so would be premature.

Previous use of the tests

A.30 One respondent pointed out that the Oftel statement, Access to Bandwidth: Delivering competition for the information age (November 1999), which considered the issue of local-loop unbundling (LLU) did not use the framework for open access outlined in the consultation document. The Access to Bandwidth statement preceded the release of the open access consultation document by some considerable time and the tests had not been articulated at that time. But during the course of the Access to Bandwidth consultation the same issues were, in practice, considered: market power, costs and benefits, effectiveness and proportionality. It was explicitly stated that BT had a strong position in the market for local access. In addition, a cost-benefit analysis was carried out which suggested that the benefits of LLU would be significantly larger than the costs.

• It does not appear to allow for the incorporation of indirect pricing constraints. Nor does it ensure that the relevant market includes all of the services which might act as a competitive constraint.
• Given that prices are set on a national basis by most operators, a market definition of this sort does not reflect the nature of the price setting process.
  

• There is no direct competition or substitutability among some of the services contained within it
• The market shares which result from a national market definition do not always reflect the degree of market power of firms in the market.
  

Source: Pay TV operators

^± The four premium channels referred to are Sky Sports 1 and 2, Sky Premier and Sky Moviemax. Some operators provide additional bonus channels. Prices quoted are additional to the basic package price.
^¤These prices include the cost of a phone line.

A.55 Although the prices charged by the various companies do not suggest that cable operators are able to price above the competitive level for their pay TV offerings, they may be able to make supra-normal profits by having lower costs than their competitors.

A.56 One major component of cost in the pay TV market is the cost of programming. The sellers of such programming may have a degree of market power, especially when the programming is particularly valuable to consumers. If cable operators are able to secure programming at substantially lower prices than their main competitors in the retail pay TV market this could allow them to make supra-normal profits from retailing pay TV. However, evidence considered by Oftel suggests that cable operators do not secure programming at significantly lower rates than their main competitors.

A.57 Some respondents suggested cable operators may be able to make supra-normal profits through an economy of scope, which arises when costs per product fall as more types of products are produced. Cable companies are able to offer both pay TV and telephony (and other services over their digital networks) as a result of their investment in cable infrastructure, and a significant proportion of costs are shared between the different services. By virtue of an economy of scope, therefore, cable companies may be able to price their pay TV and telephony services at a level above their own costs but below the costs of their competitors. This would allow them to enjoy supra-normal profits (ie profits higher than they could expect to earn in a competitive market) in the long run without losing market share.

A.58 In order to assess the strength of this argument, Oftel has examined the profitability of cable companies. Oftel asked the two largest cable operators, NTL and Telewest, to provide information on the financial performance of their pay TV operations. The information was provided on commercial-in-confidence terms. Analysis of the information did not suggest that NTL and Telewest were able to generate high cash flows, largely due to the significant investment required to finance the construction of cable networks and supply new digital services. In order for the proposition that cable companies derive market power from an unmatchable economy of scope to be supported, the financial data would need to show clear evidence of the earning of supra-normal profits. The data do not show this, and Oftel's view is that the proposition is not supported by the facts and data currently available.

A.59 It is however possible that cable operators could enjoy an unmatchable economy of scope and market power in the future, and the issue could be reassessed if there were evidence that cable companies were earning supra-normal profits. In respect of the current inquiry, Oftel concludes that it would not be appropriate, at present, for cable operators to be subject to an open access requirement.

Market power in higher bandwidth services

A.60 It has been suggested that as higher bandwidth services are made more widely available, cable operators will develop market power as a result of the fact that cable networks have inherent advantages over other forms of networks (such as DSL) which carry similar services.

A.61 It is, of course, far too early to anticipate whether this will or will not be the case. It will depend on the extent to which consumers regard different forms of network as substitutable and on the degree of competition which emerges in the market for higher bandwidth services.

A.62 There are signs that cable companies will face significant competitive pressure in the market. For example, Internet service providers who wish to supply high-speed Internet access will soon have a choice of three options:

• Concluding a commercial agreement with cable operators. Cable operators may be willing to grant access to their network to Internet service providers even if there is no regulatory requirement on them to do so.
• Obtaining wholesale Asymmetric Digital Subscriber Line (ADSL) services from BT, whose local network is ubiquitous. BT is obliged to supply a wholesale ADSL service to other operators on non-discriminatory terms. Where BT has installed ADSL equipment in its exchanges therefore, any company wishing to provide services using ADSL – Internet service providers, video-on-demand suppliers and other companies – will be able to request access from BT on terms which are overseen by Oftel. Currently, over a third of UK homes and businesses are able to receive higher bandwidth services using BT's ADSL service. BT has said that it is aiming to increase ADSL coverage to half of the UK's homes and businesses by mid-2001.
• Local loop unbundling is now coming into effect. This allows companies to install their own equipment in BT exchanges and lease local loops from BT on terms which are regulated by Oftel.
  

• BT's local network is ubiquitous;
  
• BT has a very strong position in the local access market, with limited direct competition;
  
• BT is likely to remain the primary supplier of local access in the near future.
  

A.68 One respondent argued that the asymmetry of regulation between BT and cable operators would lead to a distortion in competition. An argument put forward was that service providers (eg Internet service providers) connected to cable networks will be able to gain access to more customers than those connected to the BT network and that this causes a significant distortion in competition. However, consumers will be able to choose DSL services if they believe that DSL, or any other platform, offers a better deal than cable in terms of price or the number of service providers available. Where there might be a competition concern is if cable operators are not constrained by the availability of alternative higher bandwidth service platforms, and if they charge different prices or differentiate in service quality between areas where they face competition and areas in which they do not face competition. But there is no certainty that this will be the case.

A.69 One respondent suggested that cable operators would be at an advantage in providing backbone infrastructure to broadband service providers, since service providers connected to cable networks could connect with other networks, but those connected to the BT network could not connect with cable networks. Such disadvantage could occur in theory, but its size would depend on how many people were connected to each cable network out of the total number of higher bandwidth customers. Given that cable operators are offering higher bandwidth services to a very limited extent at present it is not possible to state whether a significant competition distortion will arise.

A.70 A number of cable companies made the point that any concerns about regulatory asymmetry would be better addressed through lifting the obligations on BT rather than imposing new obligations on cable operators. The regulatory obligations on BT may be lifted following Oftel's review of effective competition in the market for higher bandwidth services which is scheduled to begin in 2004. As the Oftel statement, Access to Bandwidth: Delivering competition for the information age made clear, other technologies, including cable, might in time provide a real alternative to higher bandwidth services delivered over the BT local loop. It also stated that Oftel would withdraw from regulation when the development of other technologies led to effective competition in the provision of higher bandwidth access.

A.71 As well as considering higher bandwidth services, the consultation document also considered whether there was a distortion in competition in the pay TV market caused by the fact that different TV platforms had different access obligations. There was a suggestion that some companies may be disadvantaged in bidding for programming rights because they do not have a guaranteed right of access to cable viewers. Cable companies, on the other hand, are able to obtain ready access to digital satellite viewers through being able to lease transponder capacity on the relevant satellite and obtaining conditional access from the relevant provider on the digital satellite system.

A.72 Whether such a distortion exists in practice partly depends on the ease with which independent channel providers can gain access to the digital satellite platform. It may well be the case that cable operators' channels, amongst others, do not find independent access to the digital satellite platform an attractive option in practice. As noted in the Competition Commission's report, NTL Incorporated and Cable and Wireless Communications plc (March 2000), using the route of independent access to the digital satellite platform requires extra investment in a distribution infrastructure. This weakens the competitive constraint provided by the route of independent access to the digital satellite platform, which in turn makes any distortion in the market for programming rights less likely.

Costs and benefits of open access

A.73 Given that the first test for mandating open access has not been passed (ie cable companies lack market power in the relevant markets), the costs and benefits of open access have not been considered in detail.

A.74 Respondents described a number of different costs and benefits which might result from open access. Cable companies, for instance, stated that open access would lead to practical problems in allocating capacity on cable networks between different uses. Oftel acknowledges that such problems might well exist. In deciding whether to mandate open access Oftel would need to consider how much regulation was necessary to implement the particular open access obligation. The more regulation necessary to give practical effect to a particular open access obligation, the higher the costs of complying with it are likely to be, and this will affect the overall cost-benefit analysis.

A.75 Cable companies also argued that open access could have a significant effect on their investment plans and the conversion of their networks to carry digital services. Other respondents argued that cable operators were unlikely to further build out their networks and so the costs of open access would be minimal, adding that investment in infrastructure need not be affected if the prices are set such that the operator is able to receive a reasonable rate of return.

A.76 Some benefits to open access were mentioned by respondents including a wider choice of services for consumers, and the achievement of so-called 'any-to-any connectivity'

A.77 If cable companies were found to possess market power in future, the size of the various costs and benefits would be evaluated in greater detail in deciding whether to mandate open access to their networks.

Role of price-capping

A.78 One respondent suggested that price-capping should be used as an alternative to open access obligations and this would prevent any anti-competitive behaviour. Oftel acknowledges that price-capping is a valuable regulatory tool. But it is not a panacea, and other measures may be needed to ensure effective competition. For example, a pay TV provider may give more prominence to its own programming in channel selection menus. A price cap would not be able to solve such problems, but a provision that access to competing TV channels is provided on fair, reasonable and non-discriminatory terms would. Each case would be considered separately, and the conditions imposed in each situation would be different, so as to keep regulation to the minimum necessary. It should also be remembered that price capping is much more intrusive than open access and would require a proportionately greater obstacle to effective competition before it was mandated.

Sources: Company figures

Chart One: Shares in the pay TV market
(percentage of total subscribers)
Sources: Company figures

A.81 It is also useful to consider the shares of the different operators in terms of revenues. Different pay TV platforms have varying numbers of premium and basic subscribers. This is reflected in the pay-to-basic ratio, ie the ratio of the number of subscribers taking premium channels to the number of subscribers taking basic channels. For instance, BSkyB has a pay-to-basic ratio of 282% at the end of June 2000 whilst cable companies had an average ratio of 116% [Source: BSkyB annual results, August 2000]. This means that in terms of revenues, BSkyB's market share is higher than in terms of subscribers, whilst that of cable companies is correspondingly lower. Table Three is taken from the Competition Commission report, NTL Incorporated and Cable and Wireless Communications plc, March 2000.

Table Three: Revenues (retail subscription and advertising)
and market shares of pay TV operators in 1999