2 Framework for imposing open access
3 Open access to cable networks
4 The need for open access regulation in future
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
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
- 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.
The importance of effective competition
1.1 Effective competition is the single most important means of securing
Oftel's goal of achieving the best possible deal for the consumer. Effective
competition means competition which brings tangible benefits to consumers,
eg lower prices, higher quality and greater choice of services, and which
enables consumers to exercise choice effectively. A market which is effectively
competitive does not require sector-specific regulation to promote competition.
The Oftel strategy statement: Achieving the best deal for telecoms consumers,
published in January 2000, discusses the concept of effective competition
in more detail.
1.2 Effective competition in communications markets has been hard to achieve
for a number of different reasons. First, former monopolists, with extensive
networks, have retained market power in a number of markets. Second, the
number of communications networks is limited because of the costs of construction
involved. Third, the shortage of spectrum means there can only be a limited
number of network operators in some markets, eg mobile telephony.
1.3 These barriers to effective competition are being broken down by developments
in technology. In particular, the convergence of the telecommunications,
broadcasting and information technology industries means that the scope
for competition is increasing. For the consumer, convergence means that
existing services can be delivered in new ways, eg telephony can be provided
through the Internet. New services can also be provided on existing networks.
Video-on-demand, for instance, is being supplied through upgraded telephone
lines. And new networks allow new services to be made available, eg high-speed
Internet access will be able to be offered through third-generation mobile
1.4 Effective competition is not yet in place in all communications markets,
however, so regulation to promote it may be necessary. But sector-specific
regulation should only be used where it is likely to bring benefit to
consumers. Also, the extent of regulation should be kept to the minimum
necessary to obtain appropriate outcomes. These principles are set out
in the Oftel strategy statement: Achieving the best deal for telecoms
consumers, published in January 2000.
1.5 The aim of keeping regulation to the minimum necessary is central
to securing Oftel's goal of achieving the best possible deal for the consumer.
Regulation where none is justified can distort or undermine competition.
For example, it can encourage inefficient suppliers to enter the market,
thereby raising costs to consumers. It can also reduce the incentive for
innovation and development of services. At a time when technology is making
revolutionary new services possible, a slowdown in innovation, or an increase
in costs, caused by the burden of regulation would be damaging to consumers.
Promoting effective competition through open access
1.6 One way of promoting effective competition is through regulation to
require open access to communications infrastructure. An open access obligation
is a requirement which makes facilities and/or services available to another
undertaking, on regulated terms, for the purpose of providing communications
1.7 Examples of open access obligations in the communications sector include:
- Obligations on
operators of telephone networks to interconnect with other network
- Obligations on
telecoms operators to offer access to their networks to third-party
service providers who wish to provide telephony to consumers.
1.8 Open access obligations
allow consumers to obtain communications services from a number of different
suppliers over the same communications infrastructure. Such obligations
can play an important role in promoting effective competition for communications
services. Open access may not always be appropriate, however, and can,
in certain circumstances, undermine incentives to invest in network provision.
- 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.
The consultation document
1.9 Regulatory certainty is important at a time when the development of
new communications networks and services will demand significant levels
of new investment. For this reason, Oftel has decided to outline the clear
and unambiguous tests which it will use to consider whether open access
regulation is appropriate.
1.10 Oftel set out its proposed tests in the consultation document, Open
access to communications networks: Ensuring competition in the provision
of services ('the consultation document'), which was published in April
1.11 The consultation document stated Oftel's belief that open access
obligations should only be imposed for competition reasons on undertakings
with market power. Where market power exists, undertakings are not constrained
effectively by competition. Firms with market power are therefore able
to restrict services or reduce quality below the level that
would obtain in a competitive environment, or to raise prices consistently
and profitably above the competitive level.
1.12 Firms lacking market power are effectively constrained by competition,
however, and it is therefore unnecessary to impose regulatory obligations
for competition reasons upon them. Imposing open access on operators without
market power could hinder competition, not help it, eg by preventing new
entrants or smaller operators from successfully expanding market share.
1.13 Even if an operator possesses market power, however, open access
requirements can work against consumers' interests, eg by deterring investment
and innovation. Only if the benefits of requiring open access exceeded
the costs would an open access obligation be appropriate. Also, there
may be a more effective and proportionate way of overcoming the obstacle
to effective competition. It is essential to examine whether this is the
case before imposing open access.
1.14 The consultation document argued that the same framework for opening
access should be applied no matter what the communications service or
network under consideration. The tests used when considering open access
to cable networks for example should be the same as those used when considering
open access to mobile phone networks.
1.15 The consultation document applied the proposed three tests for open
access to cable operators. This followed concerns expressed that the existing
arrangements for access were an obstacle to effective competition. The
consultation document considered the case for opening access to cable
networks for the purpose of delivering TV, voice telephony, interactive
TV services and higher bandwidth services. The provisional conclusion
was that it is not necessary to impose open access as a regulatory requirement
for the time being because cable operators lacked market power in the
1.16 The consultation document also considered the issue of 'reciprocal'
access. Some companies had argued that dissimilar obligations on different
companies distorted the market. But Oftel concluded that the market position
of the various players was different and that there was at present no
evidence that a significant competition distortion existed. The consultation
document also made the point that firms with more market power in the
relevant market should, in general, have more onerous regulatory obligations
than those with a lesser degree of market power.
1.17 Following publication of the consultation document, comments were
invited from interested parties. These responses were published and observations
on the responses were subsequently received. Discussions were also held
with a number of different parties. Oftel would like to thank all the
respondents for their comments. Responses were received from the following:
1.18 This statement
sets out Oftel's framework for open access, which has been reviewed and
revised in response to the comments received. The statement also describes
Oftel's response to some of the issues considered during the consultation
process. The statement is set out as follows:
- AOL Europe
- Cable and Wireless
- Open Interactive
- Northern Ireland
Advisory Committee on Telecommunications
- 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
Framework for imposing open access
Scope of this framework
2.1 This chapter outlines the tests which Oftel intends to use in deciding
whether or not to impose new open access obligations for competition reasons,
using its existing legal powers. Oftel will also use these tests to decide
to the extent it has the powers to do so whether existing
open access obligations should be maintained, extended or removed.
2.2 The Director General of Telecommunications (the 'Director') cannot
as a matter of law fetter his discretion in advance and therefore retains
the ability to depart from the framework where the circumstances warrant
it. In any such cases, he would normally expect to state his reasons.
The framework and existing legislation
2.3 Current UK and European Communities (EC) legislation obliges Oftel
to act in certain areas (eg the EC Interconnection Directive, see below).
This framework does not change these aspects of Oftel's role. For example,
all providers of conditional access services for digital TV (such as encryption)
who produce and market these services are currently required to offer
access on fair, reasonable and non-discriminatory terms, regardless of
whether they possess market power or not.
2.4 Some existing legislation allows Oftel some degree of discretion as
to how it is used. For example, the dispute resolution procedure of the
EC Interconnection Directive (ie the directive on interconnection in telecommunications
with regard to ensuring universal service and interoperability through
application of the principles of Open Network Provision [97/33/EC]) allows
Oftel to decide how to settle certain interconnection disputes by considering
factors similar to those described in this Chapter, eg the promotion of
competition and the interests of users. In such cases, Oftel would normally
expect to follow the framework set out in this Chapter as far as possible
(as well as considering any other factors in the relevant legislation).
The framework and future legislation
2.5 New EC directives relevant to the communications sector are currently
being negotiated. The proposed wording contained in the draft directive
on Access to, and interconnection of, electronic communications networks
and associated facilities, would allow national regulatory authorities
broad scope to implement access obligations on undertakings with 'significant
market power' (SMP) in the relevant market, where those obligations were
adjudged to be necessary to secure effective competition. The UK is seeking
a definition of SMP that is aligned as far as possible with competition
law and practice, gives legal certainty, and enables regulators to act
where there is not yet effective competition, both in markets with a single
dominant player and oligopolistic markets characterised by a few players
and high barriers to entry.
2.6 The draft directive also proposes a broad definition of the term 'access'
stating that it means:
"the making available of facilities and/or services, to another undertaking,
under defined conditions, on either an exclusive or non-exclusive basis,
for the purpose of providing electronic communications services. It covers
inter alia: access to network elements and associated facilities and services,
which may involve the connection of equipment, by wire or wireless means
(in particular, this includes access to the local loop and to facilities
and services necessary to provide services over the local loop); access
to physical infrastructure including buildings, ducts and masts; access
to software systems including operational support systems; access to number
translation or systems offering equivalent functionality; access to mobile
networks, in particular for roaming; access to conditional access systems
for digital television services and to electronic programme guides. Interconnection
is a specific type of access implemented between public network operators."
2.7 In due course, therefore, Oftel expects that its own framework, and
the existing explicit rules, would be subsumed into a generic EC framework
of open access regulation. Oftel will then consider whether to publish
new guidelines on how it would implement this generic framework.
2.8 In the meantime, if open access regulation were perceived to be an
appropriate response to a competition problem in an area of activity where
Oftel's powers do not currently allow for such a possibility, the Director
could in principle propose a licence amendment to give the Director such
powers using the standard procedures set out in the Telecommunications
Act 1984. He would not expect to do so without following the framework
set out in this Chapter. In practice, given the period usually necessary
to secure a licence amendment, it is rather unlikely that this course
will be followed before the new EC framework comes into force.
Different types of access
2.9 The consultation document was entitled Open access to communications
networks. Oftel believes, however, that the framework for open access
is in principle applicable to associated facilities and services involved
in the supply of communications services, and not merely the networks
themselves. Application of a coherent framework for open access will ensure
that a consistent approach is taken to similar regulatory issues, regardless
of the particular infrastructure or service involved.
2.10 Also, in some cases it may be necessary to mandate open access to
more than one element of communications infrastructure in order to secure
effective competition. For instance, requiring open access to the network
of a cable operator for the purpose of providing pay TV may not have any
practical effect unless open access to the operator's conditional access
system is also mandated. In each case, Oftel would consider whether open
access to one or more infrastructure element was required in order to
secure effective competition, whilst ensuring that regulation was kept
to the minimum necessary.
2.11 Where Oftel has the discretion to use its framework for open access,
therefore, it will do so, and this will apply in considering access to
all relevant element of communications infrastructure.
Open access for public policy reasons
2.12 Open access obligations may also be necessary for public policy reasons,
as opposed to competition reasons. For instance, it may be necessary to
oblige operators of TV platforms regardless of their market power
to offer access on fair and reasonable terms to public service
broadcasters in order to ensure universal availability of those broadcasters'
services. Open access for public policy reasons is outside the scope of
this framework, which focuses on open access for competition reasons.
Oftel will continue to work closely with other regulators, particularly
the ITC, to ensure a coherent approach to regulation.
Effective competition reviews
2.13 The Oftel strategy statement described the intention to carry out
a series of reviews to assess whether or not competition is effective
in a number of different markets. Depending on the result of these effective
competition reviews, Oftel will consider whether to amend, continue, or
withdraw sector-specific regulation.
2.14 The proposed timetable for effective competition reviews is described
in Implementing Oftel's strategy: Effective competition review guidelines,
August 2000. The reviews will reach one of three conclusions:
2.15 If effective competition
was in place then regulation to promote competition would, as far as possible,
- effective competition
exists in the market segment under review;
- effective competition
is in prospect; or,
- effective competition
is not yet in prospect.
2.16 Where the market is not effectively competitive, Oftel will:
- identify why
this is the case;
- focus on where
action is needed to improve the level of competition in the market;
- consider if active
promotion of competition is appropriate and, if so, through what policy
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
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.
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
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
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
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
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
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.
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,
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
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
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.
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
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 regulatory framework for open access
A.1 This annex considers particular issues raised in response to Chapter
2 of the consultation document which described Oftel's framework for open
access, and provides Oftel's response to the points raised.
A.2 In general, there was support for Oftel's intention to adopt a coherent
approach to all open access issues. There was also a broad consensus that
convergence between the telecommunications, broadcasting and information
technology industries meant that a coherent regulatory framework applicable
across all three sectors was necessary. Specifically, most respondents
agreed that the tests for open access should be applicable across different
platforms and for different services.
A.3 One respondent suggested that the term 'open access' was inappropriate
and that 'forced access' should be used instead to describe a specific
regulatory requirement to provide open access. Oftel prefers to use the
term 'open access' but recognises that open access may emerge without
a need for deliberate regulation.
Need for tests
A.4 One respondent argued that the benefits of mandating open access to
all broadband platforms were such that it should be imposed on all operators
of broadband networks, regardless of their market power and without examining
whether the benefits of open access exceeded any costs, or whether open
access was a proportionate instrument.
A.5 Oftel believes all three of its tests for open access are necessary
in order to ensure that the extent of regulation is appropriate. In markets
where effective competition is in place, regulation to promote competition
is not merely unnecessary; it could be positively harmful, eg it could
slow down the introduction of new services.
A.6 Equally however, a failure to regulate when necessary can lead to
consumers' interests being damaged. In markets where effective competition
did not exist, regulation to promote competition might therefore be justified.
But it should only be imposed on those with market power. Operators without
market power cannot charge higher prices than the competitive level or
reduce the quality of services below the competitive level. They cannot,
therefore, restrict or distort competition to the detriment of consumers.
A.7 Concern is often expressed about so-called 'gateways'. These 'gateways'
are usually regarded as networks or facilities through which supply of
a communications service to consumers is delivered. It is often asserted
that the operators of 'gateways' have control over the consumer, and that
regulation is therefore necessary to ensure that the gatekeeper's power
is not used to have a detrimental effect on consumers, eg by discriminating
against third-party service providers. Operators of these 'gateways' will
only be able to act with a detrimental effect on consumers, however, if
they have a sufficiently strong market position to allow them to restrict
or distort competition.
A.8 Take the example of a pay TV platform operator, Platco, which has
its own programming arm, Teleco. Platco might have an incentive to deny
access to a broadcaster, XYZ, if the programmes produced by XYZ were in
direct competition with those made by Teleco. But whether Platco would
be able to profitably deny access to XYZ would depend on a number of factors
A.9 If Platco were
to deny access to XYZ, then the latter could seek carriage on an alternative
platform operator, Cabco. If XYZ's programming were sufficiently valued
by consumers, they would leave Platco and take services from Cabco instead.
The more vigorous the competition for subscribers between Platco and Cabco
the less likely it is that either of them will be in a position to deny
access to their platforms to XYZ, or indeed to any other broadcaster.
- 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.
A.10 Platco might be in a position to deny access to XYZ if:
- XYZ's programming
was not particularly valued by consumers.
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
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.
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
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
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
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.
Application of framework to cable operators
A.31 The consultation document applied its 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 evidence, it was concluded
that none of the cable operators possessed market power in the relevant
markets and for this reason the provisional conclusion was that regulatory
intervention to require open access was not necessary at present.
A.32 Representations made during the consultation period have not altered
Oftel's preliminary conclusion that none of the major cable operators
possess market power in any of the relevant markets. This conclusion was
reached following an assessment of the market. The results of that assessment
were published in the consultation document. Some of the specific points
raised by respondents are discussed in detail below.
Product market definition
A.33 Some respondents said that cable operators should be defined as operating
in a distinct product market because they were the only companies able
to offer a package of TV, telephony and other services.
A.34 Oftel believes that different elements of any bundle are substitutable
for similar elements which are not offered in a bundle. Pay TV services
available from satellite, digital terrestrial and cable platforms are
thus in the same product market whether or not pay TV is supplied as part
of a bundle. The price charged for the bundle is constrained by the prices
charged by other suppliers for the individual elements of the bundle,
or for close substitutes to these elements. Those elements, and substitutes
for those elements, are therefore in the same market as the bundle. Oftel
does not therefore agree that the package (or bundle) of services offered
by cable companies means that they should be regarded as being in a separate
A.35 Based on the standard approach to market definition therefore, Oftel
believes that the bundled services of cable operators belong in the same
retail product market as other non-bundled offerings. This has been the
conclusion of a number of investigations by competition authorities including
the Competition Commission report, NTL Incorporated and Cable and Wireless
Communications plc (March 2000) and the Office of Fair Trading report,
The Director General's review of BSkyB's position in the wholesale pay
TV market, (December 1996).
Geographic market definition
A.36 A number of respondents queried why the consultation document defined
cable operators to be operating in the same geographic market when they
do not directly compete against each other. Instead, cable companies offer
their services in geographically distinct areas.
A.37 In assessing market power, the objective of market definition is
to define the market in such a way that it includes all of the services
which effectively constrain the price of the service in question. Unless
the relevant market includes all such services, some of the constraining
effect on prices will not be taken into account in evaluating the level
of market power possessed by the operator concerned.
A.38 In order for one service to constrain the price of another it is
not necessary for individual customers to be able to directly substitute
one service for the other. This is because pricing constraints can operate
indirectly, ie companies outside the direct geographical area in which
an operator competes might have an indirect constraining effect on the
A.39 This is the basis of the chain of substitutability argument described
in the consultation document. It was argued that a chain of substitutability
existed between different areas in which cable operators had built out
their networks, ie each cable company faced a competitive constraint from
BT, BSkyB and ONdigital which charged uniform prices across the country.
If one cable company were to alter its prices, this would affect BSkyB
and ONdigital, and this in turn would have an impact on other cable operators.
The consultation document made the point that this so-called chain of
substitutability had to be sufficiently robust in order to find the cable
operators to be in the same geographic market.
A.40 A number of respondents argued that the chain was not robust, given
the shares of the different operators in the areas in which cable operators
had built out their networks. But Oftel believes that that the chain is
robust so long as consumers are prepared to switch from cable to other
platforms. As long as each of the cable operators is constrained in its
ability to raise prices for pay TV by competitors who operate uniform
pricing nationwide, therefore, a chain of substitutability between different
cable operators can exist. One respondent provided survey evidence which,
it was claimed, showed that consumers are willing and able to switch from
the cable platform to other competing platforms.
A.41 One respondent said that even if there was a chain of substitutability
which led to cable operators being in the same geographic market, this
would not mean that there was a national market. Instead, the relevant
geographic market in these circumstances should be the areas in which
at least one cable company had built out its network. This would exclude
those areas in which there was no cable operator.
A.42 In those areas, however, there are two competing pay TV suppliers
BSkyB and ONdigital rather than three. But both BSkyB and
ONdigital charge uniform prices nationwide. Given that they both face
a pricing constraint from cable companies in areas where the latter operate,
it is likely that the effects of this pricing constraint are felt in areas
in which no cable company offers pay TV.
A.43 For market shares to be valuable indicators of market power, however,
the geographical market definition ought to lead to market shares which
are useful. Increases in market power should lead to either market shares
at existing prices rising, or prices being allowed to rise with existing
market shares retained.
A.44 One respondent put forward an example which suggested that movements
in market share under changing market definitions can be misleading. It
was suggested, for instance, that if a national competitor to cable companies
were to begin charging the same price in cabled and non-cabled areas (having
previously charged differentiated prices), this would lead to an increase
in the price it charged in cabled areas. The newly-introduced uniform
national tariff could lead to the geographic market definition being changed
from local to national, which would mean that the market shares of cable
companies would fall. But it was argued that the cable companies would
have more market power than previously, not less, since the pricing constraint
offered by the national operator would be weaker.
A.45 It is worth noting that the example put forward relies on the ability
of the national competitor to set prices, ie it possesses some degree
of market power itself. Notwithstanding this market power, the national
competitor will face a competitive constraint from cable operators which
will restrain its ability to raise prices in cabled areas. The effects
of this constraint will, in turn, be felt in areas where cable companies
do not operate, through the uniform national tariff. A local market definition
would not capture the effect of this constraint, but a national market
A.46 Some respondents argued that the market share data which resulted
from a national market definition tended to understate the position of
cable companies. It is important to remember that market share alone is
an incomplete indicator of market power. The low market shares of cable
companies derived from a national market definition would not necessarily,
therefore, indicate a complete absence of market power.
A.47 The converse would also be true however, ie the high market shares
of cable companies resulting from a local market definition, would not,
in themselves, provide conclusive evidence of market power. Cable operators
suggested that even if a local market definition was used, this would
not mean that they possessed market power. Although cable operators have
higher market shares in their local operating areas than in a national
market, it was argued that they still face competitive constraints from
BT, other pay TV operators and from other providers of higher bandwidth
and interactive TV services. For example, if a cable company were to increase
the prices for its pay TV services, consumers could switch, at little
cost, to either of the other two pay TV operators, BSkyB or ONdigital.
It was argued that the low costs of moving from one platform to another
meant that cable operators would not possess market power even if the
market were defined on a local basis.
A.48 In summary, a local market definition has a number of associated
A.49 A national market
definition also has some weaknesses:
- 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.
A.50 The first of these
difficulties of a national market definition can be addressed through
considering the applicability of the chain of substitutability argument,
which allows for a market to include services between which individual
customers could not substitute. The second can be addressed through ensuring
that other measures of market power, such as profitability, are taken
into account alongside market shares in deciding whether or not market
power exists. Oftel has considered the profitability of cable operators
but has not seen evidence that the cable operators are able to make supra-normal
profits, ie profits higher than they could expect to earn in a competitive
market, in the long run without losing market share. This issue is considered
in greater detail below.
- There is no direct
competition or substitutability among some of the services contained
- The market shares
which result from a national market definition do not always reflect
the degree of market power of firms in the market.
Assessment of market power
Market power and profitability
A.51 Oftel believes that cable companies face a competitive constraint
from BT in the area of telephony, and BSkyB and ONdigital in the case
of pay TV. The strength of the constraint is sufficient to prevent them
from raising prices for their services above the competitive level.
A.52 Evidence presented by BT during the current BT price control review
covering the financial year 1999/2000 and the first half of 2000/01 suggests
that BT is unable to make returns significantly in excess of the cost
of capital in the residential telephony market. Since cable operators
have a similar telephony tariff structure to BT, it is unlikely that they
are making excess returns in this market unless they have lower
costs through an economy of scope (see paragraphs A.57-59 below).
A.53 It should also be remembered that there are a number of different
companies providing competition to BT and cable companies in the voice
telephony market. Indirect access provision and regulation has provided
firms without their own networks with the opportunity to enter the calls
market without owning an access network. Developments such as carrier
pre-selection and local-loop unbundling are likely to increase competition
further by lowering the barriers to entry into the market. This is likely
to further limit the opportunities for any operator in the market to make
A.54 In the case of pay TV, there is also no evidence that cable operators
are able to make supra-normal profits. Price comparisons between pay TV
operators do not suggest that cable operators are able to charge prices
above the competitive level. Price comparisons between the various pay
TV operators are not straightforward given that there is a considerable
difference in the channels included by each operator in its various programming
packages. In addition, cable operators (but not BSkyB or ONdigital) may
include a phone line along with their pay TV services. Table One shows
some of the various digital pay TV offers available through the various
operators, although it should be noted that the number and identity of
channels available in each package differ. Where prices for cable packages
include the cost for a phone line, this is indicated in the table.
Table One: Pay TV offers in December 2000
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
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
Market power in
- 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
- 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.
A.63 One respondent commented that support for the argument that cable
companies possessed market power came from the fact that they were able
to deny access to their networks to TV channels which were clearly valued
by consumers. On the other hand, cable operators argued that capacity
constraints meant that they were unable to offer access to every service.
A.64 Once the transition from analogue to digital has been completed (which
might take some time) such capacity constraints should be considerably
eased, if not entirely eliminated. Denying access to a particular channel
(especially one which has been popular on competing platforms) for reasons
of capacity should therefore be less common. Indeed, NTL has told the
Competition Commission that an enlargement in capacity will enable more
small channel providers to reach audiences through cable networks (see
NTL Incorporated and Cable and Wireless Communications plc, Competition
Commission, March 2000).
A.65 The Competition Act guidelines, Assessment of Market Power, make
clear that market power may manifest itself as an ability to profitably
supply goods of a lower quality than would be provided in a competitive
environment. The denial of access to TV channels (or indeed any other
service) which clearly had consumer appeal could therefore indicate the
possession of market power. This would be relevant in the context of future
reviews of effective competition.
A.66 One respondent argued that the imposition of local loop unbundling
should necessitate open access obligations on cable operators in order
to minimise regulatory asymmetry. The existence of different regulatory
obligations on operators in the same market is not, in itself, a concern;
as discussed in Chapter 2, Oftel believes that the degree of regulation
should be proportional to the level of market power possessed.
A.67 The Oftel statement on local-loop unbundling, Access to Bandwidth:
Delivering competition for the information age, November 1999, made clear
that open access obligations on BT were appropriate for three main reasons:
- BT's local network
- 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
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
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
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.
A.79 The relevant markets are changing rapidly, so it may be useful to
update the statistics presented in the consultation document for market
shares in the pay TV and telephony markets. Cable companies, at present,
are supplying interactive services and higher bandwidth services to limited
numbers of their subscribers.
A.80 Table Two shows the number of subscribers of the various pay TV operators.
Since the consultation document was published, NTL and CWC have formally
enacted their merger, hence CWC is no longer active in the market. Chart
One shows the changes in market share for each of the major pay TV operators.
It also compares the shares taken by the cable platform as a whole, and
demonstrates that although the cable platform has approached the satellite
platform it has not yet overtaken it. In the past year or so, BSkyB has
enjoyed a rising market share.
Table Two: Market shares of main pay TV operators
(at December 31 2000)
||% of total
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
A.82 The Competition Commission acknowledged that these figures tend
to overstate BSkyB's share of retail operators' revenues, because they
include advertising revenues, which are more properly attributable to
BSkyB as a channel provider, rather than as a platform operator. Nevertheless,
the Commission states that BSkyB's revenue share, excluding advertising
revenues, would still be around 60 per cent. The combined share of NTL
and CWC (who have now merged to become the largest single cable operator)
is around 20 per cent.
A.83 The latest available shares in the provision of local access and
calls are presented in Charts Two and Three.
Chart Two: Fixed operators' exchange line numbers connected
(percentage of total at end of June 2000)
Source: Oftel Market Information Update, published November 2000
Chart Three: Call revenues by operator
(percentage of total at end of June 2000)
Source: Oftel Market Information Update, published November 2000
Glossary of terms
Asymmetric digital subscriber line (ADSL) a technology that
allows the use of a copper line to send a large quantity of data (eg a
television picture) in one direction and a small quantity (eg a control
channel and a telephone call) in the other
Bandwidth the physical characteristic of a telecommunications
system that indicates the speed at which information can be transferred.
In analogue systems, it is measured in cycles per second (Hertz) and in
digital systems in binary bits per second (bit/s).
Barriers to Entry an additional cost which must be borne
by entrants but not by firms already in the industry; or other factors,
which enable an incumbent to maintain prices above the competitive level
without inducing entry.
Basic channels traditionally these were the channels which
all TV subscribers received as part of the basic package. The term is
increasingly being used to describe non-premium channels. These are predominantly
general news and entertainment channels. See also premium channels
Broadband service/network a service or network allowing
a considerable amount of information to be conveyed rapidly, such as television
pictures. Generally defined as a bandwidth greater than 2Mbit/s.
Conditional access the systems and technology used to ensure
that only those consumers who have paid to receive a service, or who live
in a given geographical area are able to watch that service, ie access
is restricted to those who meet the conditions. Generally conditional
access systems used with pay TV use scrambling but other methods may be
used to prevent unauthorised access
Digital the coded representation of a waveform by binary
digits, as opposed to analogue which is the direct representation of a
Digital Subscriber Line (DSL) of xDSL A family of technologies
generically referred to as DSL, or xDSL, capable of transforming ordinary
phone lines (also known as 'twisted copper pairs') into high-speed digital
lines, capable of supporting advanced services such as fast Internet access
and video-on-demand. ADSL (Asymmetric Digital Subscriber Line), HDSL (High
data rate Digital Subscriber Line) and VDSL (Very high data rate Digital
Subscriber Line) are all variants of xDSL.
Dominance a position of economic strength enjoyed by an
undertaking which enables it to prevent effective competition being maintained
on the relevant market by affording it the power to behave to an appreciable
extent independently of its competitors, customers and ultimately consumers.
Fixed radio or fixed wireless fixed link telecoms service
that connects the network to the consumer's premises by radio instead
of copper line or fibre
Free-to-air television service a television service which
can be received in a given area without charge to the viewer. Some free-to-air
services may be broadcast in scrambled form in order to limit access to
viewers in a specific geographic area. Other free-to-air services may
be broadcast in the clear ie unscrambled.
Interactive TV services this term covers two forms of interactivity.
The first is where viewers use the remote control to click to applications,
which are included in the broadcast stream. The second form of interactivity
is where the modem is used to communicate with a remote server.
Internet a global network of networks, mainly narrowband,
accessed by users with a computer and a modem via a service provider.
Local loop the access network connection between the customer's
premises and the local PSTN exchange, usually a loop comprised by two
Local loop unbundling (LLU) Local loop unbundling will mean
that other operators will be able to 'own' BT's access network connection
between the customers' premises and the local exchange (generally, the
digital local exchange), which is usually a loop comprising of two copper
wires. The customer would then be able to choose another supplier to provide
service, and would cease to have a contract with BT.
Market Power the ability of an undertaking or undertakings
consistently and profitably to charge prices higher than if it or they
faced effective competition.
Network operators those who install their own telecommunication
Open access obligation a requirement which allows companies
(whether network operators or service providers) to offer services to
the customer base of a network operator, without having to build their
own network connections to that customer base
Premium channels traditionally the term premium channels
has been used to describe channels which viewers subscribed to as an add-on
to the basic service and for which they paid a premium. Programming for
premium channels is characterised by consumers' relatively high willingness
to pay; limited supply and time-criticality.
Service provider provider of telecommunication services,
or services with a telecommunication service component, to consumers.
Third-party service providers use the networks of other companies.
Significant Market Power (SMP) The Significant Market Power
test is set out in various European Directives, including the Interconnection
Directive, the Amending Leased Lines Directive and the Revised Voice Telephony
Directive. It is used by the National Regulatory Authorities (NRA) such
as Oftel to identify those operators who must meet additional obligations
under the relevant directive. It is not an economic test, rather it requires
a consideration of the factors set out in the test within a specified
Video-on-demand a programme or film sent independently to
a customer in response to his individual request. This contrasts with
broadcast television which is sent simultaneously to all customers able
to receive it.
Competition Act guidelines, Assessment of market power
Competition Act guidelines, Market definition
Competition Act guidelines, The application in the telecommunications
Competition Commission, NTL Incorporated and Cable and Wireless Communications
plc Cm 4666
DTI-DCMS, A new future for communications
European Commission, The 1999 Communications Review: Towards a new framework
for Electronic Communications infrastructure and associated services,
HMSO, Competition Act 1998
HMSO, Telecommunications Act 1984
Oftel, Access to Bandwidth: Delivering competition for the information
Oftel, Implementing Oftel's strategy: Effective competition review guidelines
Oftel, Guidelines on Market Influence determinations
Oftel, Implementing Oftel's strategy: Effective competition review guidelines
Oftel, Market Information update
Oftel, Proposals for implementing Oftel's strategy: 2000/01 Management
Oftel, Oftel strategy statement: Achieving the best deal for telecoms
Oftel, Open access to communications networks: Ensuring competition in
the provision of services
Oftel, Price control review consultation
Office of Fair Trading, The Director General's review of BSkyB's position
in the wholesale pay TV market