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Consultation document April 2000 Chapter 1 - Introduction Chapter 2 - A framework for the imposition of an open access obligation Chapter 3 - Open access to broadband cable networks for TV Chapter 4 -Open access to broadband cable networks for other service Chapter 5 - Summary of issues Annex A: Obligations of the regulated operator Appendix I: Glossary of terms Appendix II: Relevant sources S1 This consultation document describes the tests which Oftel would apply in deciding when an operator of a communications network would be required, for reasons of competition, to supply access to its network to other companies. This is known as an open access obligation. The proposed framework is applied to operators of cable networks in examining whether they should be required to offer open access for the delivery of services over their networks. Oftel seeks views on its proposed framework and on its provisional conclusion that regulation to require open access to cable networks is not justified at present. Operators are free to agree commercial agreements for access. Indeed Oftel expects these to increase as competition increases S2 Oftel’s proposed framework for open access reflects its goal of achieving the best deal for consumers in terms of choice, quality and value for money. Effective competition is the single most important means of securing this goal. The Oftel strategy statement: Achieving the best deal for telecoms consumers, published in January 2000, brought a new approach to Oftel’s work, which means that as competition increases, existing regulation will be progressively reduced – provided consumers are adequately protected. New regulation meanwhile will only be introduced if it is absolutely necessary for the promotion of effective competition and for the protection of consumers, and if these aims cannot be achieved in any other way. S3 The proposed framework for open access reflects this approach. Oftel believes there is a case for requiring open access if lack of access is a barrier to effective competition and if access is likely to benefit consumers. If access were to be required, the measures should be the minimum necessary to resolve the competition problem. Oftel’s provisional view is that the imposition of an open access obligation would be justified by competition concerns if three explicit conditions were fulfilled:
S4 Assessing the case for access against these tests will provide a consistent and coherent approach, applicable to all communications platforms. There may be additional public policy reasons for introducing an open access obligation. However, these are not within the remit of this document which considers open access for competition reasons alone. S5 This consultation document does not affect existing access obligations. It aims to provide a common framework for considering whether open access obligations should be imposed for competition reasons in areas where there are no such existing requirements. In cases where open access obligations currently exist and Oftel has some discretion over their interpretation, it would normally expect to follow this framework as far as possible. As existing obligations are reviewed, whether during the course of a market segment review or otherwise, Oftel will use this framework as the basis for deciding whether a change in the obligation is appropriate. S6 This document applies the three tests for open access to operators of cable networks, in the light of arguments by current or potential providers of services over cable networks that the current position is an obstacle to effective competition. S7 Pay TV and voice telephony are currently the two main services offered by cable operators, but other services are likely to be available in the near future. Oftel has examined in detail the issue of open access for the purpose of delivering pay TV, voice telephony, interactive TV services (such as home shopping) and higher bandwidth services (such as high-speed internet access). The provisional conclusion reached is that none of the cable operators possess market power in the relevant markets. If this is correct, it implies that there is no justification at present to mandate open access to cable networks. S8 BT has argued that the fact that it does not have access to the networks of cable operators but the cable operators have access to BT’s network creates a distortion in the market. Oftel has also considered this argument but does not believe that the lack of a reciprocal right of access is likely to distort the competitive process to a sufficient degree to justify mandating open access to cable at present. However if such a lack of ‘reciprocal’ access were to distort the market to a significant extent, Oftel would consider how best to remedy the problem. S9 Oftel seeks the views of respondents on its analysis and provisional conclusions. In any event, Oftel will keep all the relevant markets under review, as part of a regular programme of market segment reviews. S10 The consultation period for this document will run until 16th June 2000, with a further 2 weeks for comments on the responses received. Details on how responses may be submitted are given in Chapter 5. Introduction Definition of open access 1.1 Oftel has played a key part in promoting greater competition in the telecoms industry. Effective competition in telecoms markets has a central role in fulfilling Oftel’s goal of achieving the best deal for the consumer in terms of choice, quality and value for money. 1.2 In certain cases, open access obligations have been imposed by Oftel to help achieve effective competition. Through indirect access, for example, consumers connected to the BT network can obtain telephony services from a range of competing companies. In other cases, general access obligations have been imposed on operators as a result of the implementation of European Communities (EC) legislation (see paragraph 2.5). An open access obligation allows companies which wish to offer communication services to consumers to do so via the communications network of another company. An open access obligation is therefore 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. Purpose of open access 1.3 Open access obligations allow consumers to obtain communications services from a number of different service-providers over the same communications network. They can thus increase competition in a particular market for communications services. 1.4 Open access obligations have been used in the telecoms sector because the range of networks available to consumers has historically been limited. Until relatively recently, for instance, most consumers did not have a choice between competing fixed telephone networks. 1.5 This traditional picture is changing as the communications market shifts rapidly: new networks are coming into operation whilst consumers are utilising more, new and better services from a growing number of service providers. For example, around 50% of UK households – some 12 million homes – now have a choice of fixed telephone networks. In the mobile telephone market, there are more than 25 million customers, with most having a choice between four mobile networks (compared to only two a decade ago), as well as a choice between a much larger number of service providers. 1.6 Perhaps most significantly, the convergence between the telecoms, broadcasting and information technology industries is blurring the boundaries between existing markets and increasing the scope for competition. For example, upgraded telephone networks are being used to transmit TV through the use of Digital Subscriber Line (DSL) technology, whilst voice telephony using the Internet is becoming feasible. 1.7 Despite the increase in the level of competition, Oftel cannot, at this stage, rule out the imposition of additional open access obligations in order to ensure consumers gain the benefits of competition. But Oftel believes it would be useful to establish a clear methodology for considering the competition issues which are likely to be relevant in deciding when such open access obligations should be imposed. Need for a consistent approach 1.8 Examples of open access questions which have arisen in recent years, or may do so in coming ones, include:
1.9 Oftel believes that a common approach to the competition issues which all such questions raise will become of paramount importance as convergence between different technologies accelerates. The crucial consequence of convergence is that it makes the differences between underlying communications platforms increasingly irrelevant: the same services – eg telephony, television, Internet access – can be carried over different communications platforms. Different frameworks for economic regulation of different communications platforms would be likely to distort competition, with consumers the probable losers. A generic competition framework applicable to all future questions of open access will help ensure a consistent and coherent approach. 1.10 This does not however imply that an open access obligation on one particular network will lead to an open access obligation on all. Instead, it means that each case is considered on its merits, against a consistent set of objectives and principles. 1.11 This consultation document therefore aims to provide a common framework for considering whether open access obligations should be imposed for competition reasons in areas where existing access requirements do not apply. In addition, it also aims to provide guidance on the competition concerns which Oftel is likely to consider in exercising its powers under certain existing open access provisions (see paragraph 2.5). After taking into account the views of respondents, Oftel proposes to issue a statement on the issue. 1.12 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 consultation document, however, since it considers the question of open access for competition reasons only. 1.13 Having outlined the framework for the imposition of open access for competition reasons, this consultation document applies the tests to the operators of cable networks. It has been suggested that the current position concerning the access of service providers to these networks is at present inadequate for the establishment of effective competition. Oftel’s analysis aims to test this view. 1.14 In reaching a conclusion on this issue, Oftel will liaise very closely with the Independent Television Commission (ITC) and the Office of Fair Trading (OFT) in order to ensure coherent regulation. Under its powers derived from the Broadcasting Acts of 1990 and 1996, the ITC has a duty to ensure fair and effective competition in the provision of services it licenses. The OFT has responsibility, under the Competition Act 1998 and the Fair Trading Act 1973, for competition policy in the broadcasting sector. 1.15 This consultation document is set out as follows:
A framework for the imposition of an open access obligation The framework and Oftel’s strategy 2.1 This framework has been drawn up in the light of Oftel’s goal, objectives and principles. Open access will only be imposed if it helps secure Oftel’s goal of achieving the best deal for the consumer in terms of choice, quality and value for money. The Oftel strategy statement: Achieving the best deal for telecoms consumers, (‘the Oftel strategy statement’) published in January 2000, sets four outcome-based objectives which are designed to secure this overall goal:
2.2 The outcomes sought are the benefits of effective competition – ie lower prices, higher quality, more choice of services for consumers – not competition for its own sake. Effective competition also means that it is sustainable (ie it does not depend on sector-specific regulation to survive) and that consumers are able to exercise choice successfully. 2.3 In relation to Oftel’s objectives, open access could both promote effective competition and protect consumers until effective competition was in place. But open access could only be considered as an appropriate regulatory remedy if obstacles to the establishment of effective competition existed in a particular market, eg barriers to entry which prevent a large number of firms from existing in the market. The first step in considering open access would therefore normally be to consider the overall state of competitiveness of the relevant market. 2.4 Oftel intends to carry out a series of market segment reviews which will assess the overall state of competitiveness in various markets. The Oftel strategy statement outlines the timetable for such reviews. If such a market segment review were to find that effective competition was not in place then open access may be considered as an appropriate solution. 2.5 In some cases, however, it may be necessary to consider open access between reviews, eg as a result of a complaint about anti-competitive practices, or a dispute over how existing open access provisions should be interpreted. For example, under the EC Interconnection Directive (97/33/EC), certain operators are subject to a detailed regulatory regime regarding interconnection of telecoms networks. In addition, operators who have been designated by Oftel as having Significant Market Power in certain markets also have obligations to allow Special Network Access, or SNA (see Oftel’s Draft Guidelines on Special Network Access, April 1999). As well as imposing obligations on operators, the EC Interconnection Directive gives Oftel powers to resolve disputes in relation to interconnection and SNA. 2.6 This consultation document does not affect existing access obligations. It aims to provide a common framework for considering whether open access obligations should be imposed for competition reasons in areas where there are no such existing requirements. In cases where open access obligations currently exist and Oftel has some discretion over their interpretation, it would normally expect to follow this framework as far as possible. As existing obligations are reviewed, whether during the course of a market segment review or otherwise, Oftel will use this framework as the basis for deciding whether a change in the obligation is appropriate. In all cases, Oftel may need to take account of additional public interest concerns, including some which are the responsibility of other agencies. However these are not considered as part of this framework. 2.7 The Director General of Telecommunications 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 such cases, he would expect to state his reasons. Three tests for opening access 2.8 On the basis of its published strategy, Oftel believes three explicit tests for open access are necessary to ensure that regulation benefits consumers and is kept to the minimum: (1) Does the operator of the network in question possess market power in the relevant market? (2) Are the expected benefits from mandating open access sufficient to justify the costs?(3) Is open access an effective and proportionate regulatory instrument to tackle the obstacle to effective competition which has been identified?2.9 Positive answers to the three questions would generally be required before Oftel would consider imposing an open access obligation for competition reasons. Further details of the relevant considerations in performing each of the tests are given below. Test 1: Does the operator of the network in question possess market power in the relevant market? 2.10 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. 2.11 In essence, however, market power exists when an undertaking is able to raise prices consistently and profitably above competitive levels. An undertaking with market power would be able to restrict services or reduce quality below the level that would obtain in a competitive environment. But this would mean that consumers would be paying more for a given level of service or quality and so, implicitly, the price of the product would be raised beyond the competitive level. 2.12 Dominance is the most commonly used threshold of market power. Dominance was defined by the European Commission in United Brands v Commission, ([1978] ECR 207) as: ‘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.’ 2.13 But it is also possible to have a position of economic strength below that associated with dominance. The Competition Act guidelines, Assessment of market power, state: "An undertaking is unlikely to be dominant if it does not have a substantial degree of market power. Market power is not, however, an absolute term but a matter of degree…" This recognises the existence of market power below dominance. 2.14 In considering the imposition of an open access obligation therefore, Oftel would aim to assess whether the network operator in question has the ability to consistently and profitably charge higher prices than if it faced effective competition 2.15 When gauging market power, Oftel will apply the same methods as other authorities with competition responsibilities. The Competition Act guidelines, Market definition and Assessment of market power, provide a useful guide to how competition authorities define the relevant market and evaluate market power. Also relevant are the Competition Act guidelines, The application of the Competition Act in the telecommunications sector. Oftel has concurrent powers with the OFT to apply the Competition Act 1998 in the telecoms sector and these guidelines, and the Competition Act guidelines, Concurrent application to regulated industries, describe how the concurrent powers will be used. 2.16 There a number of factors which need to be considered in assessing whether an operator of a particular communications network has market power. One important factor is the operator’s market share and changes in that share over time. Although market share alone is an incomplete indicator of market power, it is unlikely that an operator could have market power unless it accounted for a significant portion of the relevant market. 2.17 Another important consideration is whether there are constraints that would prevent the operator from acting anti-competitively, even where it does have a high market share. Such constraints could include the possibility of entry by firms not currently in the market and the existence of market power on the part of buyers. Asymmetrical access obligations 2.18 An open access obligation on one particular network operator will not necessarily lead to an open access obligation on all. Each case would instead be considered on its merits. But if two competing networks have differing rights of access associated with them there may be a distortion in the markets for communications networks and/or services which creates a significant barrier to the establishment of effective competition. 2.19 Currently, different communications networks have dissimilar rights of access associated with them, for a variety of reasons. In some cases, network operators are obliged under the terms of their licences to supply access to their networks. For example, BT and Kingston are required to offer ‘indirect access’ whereby operators of voice telephony services can establish a direct relationship with the subscribers to those networks. Access to the digital satellite TV transmission network is in practice readily available. However, broadcasters do not at present have rights of access to cable networks and spectrum limitations mean that there is no general right of access to the digital terrestrial TV network. BT does not have a reciprocal right of access to cable and other networks, even though competing network operators are able to gain access to the BT network. 2.20 Regulatory action may be justified to ensure that rights of access are made available on a reciprocal basis, but only if the asymmetrical regulation itself created a barrier to the establishment of effective competition. In order to assess this, it would be essential to assess the effect upon the competitive process, and also consider Tests 2 and 3 below. This can only be done on a case-by-case basis. The issue of reciprocal access is discussed in the specific context of broadband cable networks in Chapters 3 and 4. Test 2: Are the expected benefits of mandating open access sufficient to justify the costs? 2.21 It is important that the costs and potential benefits of mandating open access are assessed and weighed against each other. If market power were to create the potential for anti-competitive behaviour with a significant adverse effect upon consumers, there would be a case for intervention. Where harmful effects are negligible, the case is weaker. 2.22 In mandating open access, consumers’ benefits need to be identified because the aim would be to achieve 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. 2.23 Open access could lead to a number of costs. Perhaps most importantly, requiring open access can reduce incentives to invest and innovate by raising the risk of such activities at the margin. 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 (eg the mobile market), than in more established communications markets (eg the fixed telephony market). 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. 2.24 For example, if open access were to be mandated to cable networks then it is possible that the operators of these networks would not regard it as economically justifiable to further extend their networks. This in turn could mean that some consumers were denied the opportunity to receive the services of cable operators, thereby impeding competition. 2.25 Open access could also lead to other costs. For example in the case of cable operators, although open access may promote competition in the retail market for pay TV, it could, in theory, have a detrimental effect on competition in the corresponding wholesale market by strengthening any market power possessed by a pay TV wholesaler. If this were to be the case, the net benefits to consumers of mandating open access could be put at risk. In considering the costs and benefits of open access, therefore, Oftel would aim to examine the effects on competition in all the markets it believed to be relevant. 2.26 Operators also face a cost in complying with the obligation. To be effective, guaranteed rights of access often need to be accompanied by rules which prevent anti-competitive discrimination (see Annex A), margin squeezes and other anti-competitive behaviour. A margin squeeze might occur, for example, where the relationship between price of access to a network and the final product price charged by the vertically integrated network operator is such that no reasonably efficient service provider could earn a reasonable rate of return. This would be likely to have a damaging effect on competition in the service provider market. The costs of complying with such obligations are likely to be greatest in the case of new businesses or where existing businesses produce new products, since in these cases losses may be the norm for the initial period of operation, and consequently, the financial information required to assess the issues properly is difficult to obtain. Test 3: Is open access an effective and proportionate regulatory instrument to tackle the obstacle to effective competition which has been identified? 2.27 This test is designed to ensure that the extent of regulation is restricted to the minimum necessary. A determination that mandated open access would need to establish that it was the most appropriate regulatory tool to address the identified obstacle to effective competition. In general terms, open access is most likely to be suitable to address the possibility of anti-competitive behaviour where an operator of a communications network is in a position to use its control of that network to distort or restrict competition in a related market for communications services. Such anti-competitive behaviour may be more likely to occur when the network operator is also active in the related market. 2.28 In some cases open access may not be effective, in others it may not be proportionate; in some cases it will be neither. For example, if there is a concern over excessive pricing of access to competitors, price capping rather than open access may be both a more effective and proportionate regulatory remedy. 2.29 Competition law on occasion may be sufficient to deter anti-competitive behaviour. The Competition Act guidelines, The application of the Competition Act in the telecommunications sector, describe circumstances when this may be the case. Operators who are dominant have to ensure that they do not act in such a way as to abuse that dominance. In certain circumstances a refusal to grant access for the purpose of providing a service can constitute an abuse of a dominant position. The Competition Act guidelines, The application of the Competition Act in the telecommunications sector, describe these circumstances in greater detail. 2.30 An abuse of a dominant position could occur either in the market in which an undertaking is dominant or in a different but closely related market. The Competition Act guidelines, Assessment of individual agreements and conduct, describe two principal ways in which an undertaking which has a dominant position in one product market might be able to exploit that position to behave anti-competitively in another related market. These are:
2.31 It should be noted that the imposition of an open access obligation would usually be an ex-ante form of regulation designed to reduce the potential for anti-competitive behaviour in markets where there is a barrier to the establishment of effective competition. The imposition of an open access obligation may therefore be used in addition to any relevant powers under relevant competition legislation. Oftel would consider whether its powers under relevant competition legislation were sufficient to deal with any problem identified. Only if this was not the case would the use of new ex-ante regulation be contemplated. Mechanism for imposing open access obligation 2.32 In some cases, Oftel would have the ability to specify an open access obligation through existing conditions in the operator’s Telecommunications Act licence and/or through EC Directives. The mechanisms for triggering existing open access obligations vary and are set out in detail in the relevant licence conditions or the EC Directives. For example, in certain cases, such as interconnection or Special Network Access, Oftel would expect the parties to try to reach a commercial agreement and would generally only intervene at the request of either party if a dispute arises. 2.33 In some cases, however, neither an operator’s existing licence issued under the Telecommunications Act 1984 nor EC legislation will be sufficient to implement an open access obligation. If so, and if Oftel concluded that open access was justified and consistent with EC legislation, it may propose a modification to the Telecommunications Act licence of the operator in question. 2.34 The European Commission is expected to make proposals for general rules on access rights and obligations in legislation arising from The 1999 Communications Review: Towards a new framework for Electronic Communications infrastructure and associated services. It is not expected that such rules will not come into effect before approximately 2003. In due course, therefore, Oftel would expect that its own generic approach and the existing explicit rules would be subsumed into a generic EC framework of open access rules. Obligations of the regulated operator 2.35 As stated above, existing licence conditions and/or EC legislation may allow the implementation of an open access obligation. The Telecommunications Act licence or EC legislation may also specify the conditions which an operator under an open access obligation would have to abide by. These existing open access obligations may be modified from time to time to reflect changes in market conditions – but only where Oftel has the powers to do so and modifications were regarded as justified. The Oftel strategy statement indicates that it will undertake a series of market segment reviews which will assess the level of competition in particular markets and consider whether continuing regulatory measures in those markets remain necessary. If, following such a review, Oftel were to conclude that an open access obligation was no longer necessary to secure appropriate outcomes in a particular market, the obligation could be removed or modified. 2.36 If existing licence conditions and/or EC legislation did not specify the conditions which would be imposed on the regulated operator, Oftel would take appropriate steps to specify these conditions. These conditions would be designed to ensure that access was not offered on terms which were anti-competitive. 2.37 Oftel would consider whether to oblige a regulated operator to provide open access on terms, charges and conditions that did not discriminate in an anti-competitive manner between third parties which wished to supply services over the regulated operator’s network and between third parties and the regulated operator’s own services (if any). This would normally be reinforced by an obligation to publish pricing methodologies. The regulated operator could also face additional obligations such as an obligation to provide open access on ‘fair and reasonable’ terms and a more detailed financial information requirement (see Annex A). 2.38 In some cases, the supply of ancillary services by the regulated operator may be necessary. For example, an open access obligation for the purpose of delivering pay TV may not be deliverable in practice unless conditional access (eg encryption and decryption of a pay TV channel) is available. In the process of imposing an open access obligation, the issue of which ancillary services are necessary for the delivery of the relevant services over that network would have to be considered. 2.39 In order to keep regulation to the minimum necessary, the extent of regulation would reflect the degree of market power of the operator concerned. Accordingly, Oftel may forbear from imposing any of the conditions or parts of conditions as the circumstances demanded it, provided it was consistent with existing national and EC legislation. Details of the full set of conditions and the circumstances when forbearance might be appropriate are given in Annex A. 2.40 In conjunction with other European regulatory authorities, Oftel is working on transparent principles for ensuring that the conditions imposed on the regulated operator are proportionate to the competition concern which needs to be addressed. 2.41 A full set of conditions which might be imposed in whole or in part is given in Annex A. Respondents are welcome to comment on the conditions which it would be appropriate to apply in particular situations. In particular, Oftel would welcome comments on whether certain obligations (and if so which) should be considered only when the operator is dominant. Open access to broadband cable networks for TV Introduction 3.1 Broadband cable networks currently pass over half of British homes. A broadband network allows a considerable amount of information to be conveyed rapidly. The number of homes receiving TV, telephony or both from cable companies rose from around 3.8 million in October 1998 to just under 4.4 million a year later [Source: ITC]. Cable companies mainly offer TV and telephony services. A broader range will be soon be available, including interactive services such as home shopping and higher bandwidth services such as high-speed access to the Internet. 3.2 Oftel now seeks views on whether open access to broadband cable networks should be mandated for the provision of any or all services which could reasonably be provided over cable networks. For the most part, access to cable networks is negotiated commercially although there are certain regulatory access obligations (for example, so-called ‘must-carry’ rules for public service TV channels). Concern has been expressed that the current arrangements are an obstacle to the establishment of effective competition and Oftel has decided to carry out this analysis as a result. 3.3 This chapter examines whether cable operators have market power in the TV market, and discusses the other two relevant questions of the framework for open access described in Chapter 2. The next chapter discusses whether open access should be mandated for other services which are being delivered now or which are likely to be delivered over broadband cable networks in the near future. Open access for the provision of any new services will be considered in the future, when a clearer picture of the markets concerned has emerged. The current arrangements 3.4 Currently, each of the cable operators purchases TV channels from wholesalers of TV (through so-called carriage agreements) and resells those channels to its subscribers. A cable operator thus operates in two distinct, though closely related, markets: the wholesale TV market in which it is a buyer, and the retail TV market in which it is a seller. 3.5 Cable companies do not currently, with limited exceptions, produce programmes themselves, although one cable operator, Telewest, has agreed to merge with the pay TV producer and wholesaler, Flextech. Nor do cable operators sell their transmission capacity to channel providers. Instead, they act as distributors of TV channels to consumers. In the case of many cable customers, this package of channels is supplied alongside voice telephony services. 3.6 Each of the cable operators has the ability to determine which TV channels are carried over its network. But there is a mutually dependent relationship between a TV wholesaler and a cable operator: a TV wholesaler needs a distribution outlet for the channels it produces, whilst a cable operator needs attractive programming in order to draw subscribers to its platform. The range and quality of channels on offer will thus help determine how many subscribers a cable operator is able to attract. It follows that the operator would have to take into account the effect on the total number of subscribers in deciding which particular TV channels should be carried. 3.7 Cable operators are currently subject to certain access requirements, as set out in Condition 6 of their respective licences. The implications of these obligations are not transparent. They have never been tested. Oftel will consider whether they remain appropriate in the light of this consultation. Arrangements under open access 3.8 Mandating open access to a broadband cable network for the purpose of delivering TV would be likely to radically alter the relationship between the relevant cable operator and wholesalers of TV. Wholesalers of TV would be able to purchase broadcasting transmission capacity from the cable operator and could then sell their TV channels directly to consumers. The wholesaler may also need to obtain conditional access (such as the encryption and decryption of TV channels) from the relevant provider, normally the cable operator itself. 3.9 A cable operator under an open access obligation would charge an explicit price for the provision of its TV transmission infrastructure. Oftel would ensure that the terms on which access was provided were not anti-competitive (see Annex A). The cable operator would assume the role of a seller of broadcast transmission capacity while those wholesalers of TV who wished to do so could become TV retailers. The cable operator could still act as a retailer of TV by negotiating programme carriage agreements with the appropriate wholesalers. 3.10 Mandating open access to a broadband cable network could promote competition in retail TV markets. By allowing wholesalers of TV to market their channels directly to consumers connected to the network, the wholesaler would become a competitor to the cable operator (if that operator continued to be a TV retailer) and to other retailers of TV. 3.11 At present, cable operators tend to offer a package (or bundle) of telephony and TV to their subscribers. Cable operators benefit from an economy of scope, whereby they can deliver packages of services more economically than can be achieved by the aggregation of similar services from individual suppliers. The recent Oftel-ITC joint statement on bundling, The bundling of telephony and television, published in February 2000, provisionally concluded that there was no basis on which to take action against the cable operators in relation to the practices or pricing of bundled telephony and television services. In principle, however, the economy of scope could confer on cable operators a degree of market power. Evidence of abuse of that market power would lead to consideration of an open access obligation. However, in that event, open access for TV may have little effect by itself. This is because the competitive advantage conferred by the economy of scope might be insurmountable for a competitor supplying TV services only. In order to be effective therefore, an open access obligation might need to be accompanied by an obligation to supply wholesale telephony services on non-discriminatory terms. Market power in the context of open access 3.12 Open access for delivering TV can be considered if the cable operator possesses market power in a retail TV market. Such market power could be used to raise the price of the channels above competitive levels profitably for a prolonged period. 3.13 Cable operators could also possess market power in wholesale TV markets, ie buyer power in purchasing channels from wholesalers of TV. This would allow the operator concerned to exert a substantial influence on the price, quality or the terms of supply of a channel purchased. 3.14 But Oftel currently believes that a cable operator could not profitably use any buyer power it possessed in a wholesale TV market to the significant detriment of consumers, unless it also possessed market power in the corresponding retail TV market. If, for example, a cable operator with buyer power in the wholesale TV market attempted to restrict purchase of a particular channel, then it would not then be able to offer that channel to its subscribers. If that channel were highly valued by consumers then the cable operator concerned would be likely to lose subscribers. If consumers did not value a channel sufficiently, then it is possible that buyer power could be used in order to restrict purchases of that particular channel. But in such cases the detriment to consumers resulting from the exercise of the buyer power is likely to be relatively small. Assessment of market power Market definition 3.15 Definition of the relevant market is generally the first step in an assessment of market power. The relevant market will have two dimensions: the relevant goods or services (the product market); and the geographic extent of the market (the geographic market). 3.16 In the context of its consideration of the proposed merger between NTL and CWC (NTL Incorporated and Cable and Wireless Communications plc, March 2000), the Competition Commission has recently considered issues of market definition and market power which are of relevance to this consultation document. The Commission concluded that the relevant television service markets were:
3.17 Previous rulings by competition authorities have found pay TV to be in a separate product market from free-to-air TV. See, for instance, the OFT’s publication of December 1996, The Director General’s review of BSkyB’s position in the wholesale pay TV market, the Monopolies and Mergers Commission (MMC) report, British Sky Broadcasting Group plc and Manchester United plc, (released in April 1999) and the Competition Commission publication quoted above (paragraph 3.16). Although the existence of free-to-air TV places some constraint on the prices charged for pay TV – particularly for so-called basic channels, ie programming which is not charged for at a premium rate – this constraint has not been generally found to be sufficient for free-to-air TV and pay TV to be placed in the same market. The OFT have also found there to be separate wholesale markets for basic programming and premium sports and movie programming. In turn, there may also be separate retail markets for these different types of programming. For the purposes of this analysis, Oftel adopts the service market definitions previously proposed by the OFT and Competition Commission. It notes in passing, however, that its conclusions would be unaffected if basic pay TV and free-to-air TV were in the same wholesale and retail markets. 3.18 There are currently three main platforms for the delivery of retail pay TV: digital terrestrial operated by ONdigital; satellite or direct-to-home (DTH) operated by BSkyB; and, cable operated by a number of different companies (although the three largest operators by far are NTL, Telewest and Cable and Wireless Communications or CWC). 3.19 Oftel believes that these three platforms are in the same product market as it believes consumers are not generally concerned with the underlying technology used to deliver pay TV to the extent that it has a significant impact on the demand substitutability of identical packages of pay TV delivered via different platforms. In addition, the costs to consumers of moving from one pay TV platform to another (ie the switching costs) are currently minimal, since both ONdigital and BSkyB are offering subsidised set-top boxes which are free to household customers (although a fee is charged for installation of satellite dishes). As it appears to Oftel that consumers at present regard the cable and satellite platforms as good substitutes for one another, Oftel does not see any necessity to analyse the digital and analogue pay TV markets separately. This is consistent with the Competition Commission’s view. Relevant geographical markets 3.20 The OFT considered the geographical extent of the pay TV market in The Director General’s review of BSkyB’s position in the wholesale pay TV market. This stated that "the relevant market was that for pay TV in the UK." The Competition Commission’s view quoted in paragraph 3.16 above is similar. 3.21 Each of the cable operators offers its pay TV services in certain parts of the country only. This is a result of the fact that each cable operator possessed an exclusive franchise for the cable platform in particular geographical areas. The cable industry has consolidated considerably in recent years and there are now three main cable companies (two after the NTL/CWC merger has been completed), each operating in different parts of the country. Many of the exclusive cable franchises have now been given up. But it has not yet been the case that two cable operators have built different networks in the same geographical area (so-called over-building), because the returns expected from an over-built network would not justify the considerable expense involved. Each cable operator is therefore able to offer its pay TV services only in particular parts of the country. None of them is currently able to offer its pay TV services nationwide, although this may change in due course as DSL technologies are introduced. The number of homes passed by each of the main cable operators is shown in the following table: Table One: Homes passed by the three largest cable operators (at 1 October 1999)
Source: ITC 3.22 In total, just over half of British homes are passed by a broadband cable network and can therefore subscribe to cable pay TV. This is in contrast to the two other platforms for pay TV, ie digital terrestrial and satellite, both of which can be received in most parts of the country. Digital terrestrial TV can be received in almost 90% of homes (although not all homes can receive all services). Pay TV through the satellite platform meanwhile can be received in virtually the entire country (although there are occasionally restrictions that prevent particular households from installing the necessary receiving equipment). 3.23 As each of the cable companies operates in different geographical areas, it is arguable that they do not compete with each other, but do compete with other providers of pay TV. On the other hand, the market for pay TV could be viewed as a national one. The services operated by BSkyB and ONdigital are available in most parts of the country, although there are certain limitations. Moreover, BSkyB and ONdigital charge uniform prices throughout the country. This may act as an indirect constraint on the prices of cable operators, even where they do not compete directly in the same geographic area. If a cable operator in one geographical area changed its price, any pricing response from BSkyB and ONdigital would not be confined to that area but would apply nationwide. This would then have implications for cable operators in other geographical areas who may in turn have to change their prices. This would imply that each of the cable operators is in indirect competition with each other and that the relevant geographic market is national. 3.24 For this to be the case, however, there would have to be a ‘chain of substitutability’ which linked different parts of the market together. The chain of substitutability argument relies on there being a reasonably vigorous degree of competition between pay TV suppliers in each significant part of the market. These parts of the market are the ‘links’ in the ‘chain’. If there is competition in each of these links, there is a chain and hence sufficient competitive constraint on prices charged by each of the relevant parties. 3.25 Oftel considers that, at present, a chain of substitutability between cable operators’ distinct areas does exist as a result of the fact that each of the cable operators is constrained in their pricing by the availability of pay TV from BSkyB and ONdigital, both of which have uniform pricing nationwide. On the basis of a chain of substitutability argument, therefore, Oftel concludes that each of the cable operators falls within the same national market for pay TV. 3.26 The views of respondents on the relevant geographic market definition are welcome. In particular, Oftel would welcome views on whether the links in the pay TV chain of substitutability are sufficiently robust so as to mean that each of the cable operators is competing in the same national market. Level of market power 3.27 There are a number of factors which are useful in assessing whether any of the cable operators has market power in the retail pay TV markets. A discussion of a range of relevant factors is set out below. Number of operators 3.28 There are three main platforms for the receipt of pay TV: cable, digital terrestrial, and satellite. Pay TV is offered in a few distinct geographical areas by other means including fixed wireless networks and Asymmetric Digital Subscriber Line (ADSL), although the number of households receiving pay TV through such platforms is at present extremely limited. Although these newer platforms may expand further, the traditional platforms are widely expected to continue as the main means for delivering TV in the short and medium terms. If, however, other platforms rapidly become major means of delivering TV then any market power enjoyed by the existing operators would be transitory. Oftel will continue to monitor the relevant markets, and would welcome views on how the pay TV market is likely to develop. 3.29 The three main cable operators are Telewest, NTL and CWC, although the latter two have announced an intention to merge. The Competition Commission has considered the merger, after a referral by the Secretary of State for Trade and Industry, and has released its report. The report concluded that the proposed merger "may be expected not to operate against the public interest" and that it may "have beneficial effects, particularly on competition between pay-TV platforms". A number of smaller cable operators also exist, including Atlantic Telecommunications and Eurobell. A number of companies hold franchises for particular areas but have not yet built cable networks. 3.30 The digital terrestrial pay TV platform is operated by ONdigital, which controls three of the six operating multiplexes (groups of channels). ONdigital have recently set up a joint venture with S4C Digital Networks (SDN) which controls part of another multiplex in order to offer pay-per-view programming. The satellite pay TV platform, both analogue and digital, is operated by BSkyB, which is also a major supplier of wholesale pay TV to cable operators and ONdigital. Market shares 3.31 Table Two shows the market shares in terms of subscribers of the largest retailers of pay TV, as at the end of September 1999, although if the other smaller operators were included, the market share of each would fall slightly. Each of the cable operators accounts for a substantial proportion of the total number of subscribers to pay TV, although by far the largest single retailer of pay TV is BSkyB. The largest single cable operator at present is Telewest, although it should be noted that the merger between NTL and CWC will raise the market share of the merged company to over 27% of the total number of subscribers.
Trends in market shares 3.32 The market share of each of the cable companies is significantly less than that of BSkyB. This may change in coming years. Chart One demonstrates that the cable platform has increased its share of the market over the past few years.
Basic and premium programming 3.33 Much of the recent growth in cable subscribers has come in the form of so-called ‘mini-basic’ packages whereby a small selection of pay TV channels is offered with telephony at a price similar to that of telephony available from BT. Growth in this form means that the market share for premium TV services for the cable operators is smaller than its share of subscribers. The so-called pay-to-basic ratio (which shows the number of premium channels in relation to the number of basic channels taken by the average subscriber) for cable as a whole fell from 145% in 1998 to 124% in 1999. This compares with BSkyB’s satellite platform where the pay-to-basic ratio on their digital platform was 305% and their analogue platform 281% at the end of December 1999 [Source: BSkyB Group plc, Interim Results, February 2000]. 3.34 Actual figures on market shares in the specific markets identified are not available, but it is possible to make some estimates of the market share from the overall share of TV subscribers and the pay-to-basic ratios of cable and satellite based retailers. These estimates suggest that cable operators’ shares of premium TV markets are considerably smaller than those set out in the table, and that BSkyB’s share is about 69% of the national market. The same methodology can be used to estimate shares of the market for basic channels. It would appear that cable operators do have high shares of this market with NTL for example having approximately 24% of the national market. 3.35 The key question which is relevant to this consultation is whether cable companies have market power in either the basic or premium markets. In the retail premium pay TV markets the market position of the cable operators is affected by the fact that their main competitor in this market, BSkyB, is also their main supplier of wholesale premium sports and movie channels. The strong position of BSkyB in the wholesale market, along with its presence in the retail market, would appear to prevent cable operators from any enjoying any market power in the retail markets for premium sports and movies. 3.36 While cable operators may have considerable market share of the retail market for basic channels it is not clear that they have any market power in this area. Oftel has seen no evidence that either wholesalers or retailers of basic pay TV channels are able to price above the competitive level. Furthermore, even if there were the potential for market power to be exercised in this area, it is not clear whether this would accrue to wholesalers or retailers of basic pay TV. Economy of scope 3.37 As noted in paragraph 3.11, an economy of scope arises when costs per product fall as more types of products are produced. Cable companies may be able to enjoy the benefits of an economy of scope because of the significant proportion of costs that are shared between the provision to subscribers of distinct services such as telephony and pay TV. 3.38 One method of determining whether an economy of scope is relevant would be to consider whether cable companies are able to price their pay TV 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. Oftel has not seen convincing evidence that the cable operators are currently earning supra-normal profits as a result of an economy of scope. Barriers to entry 3.39 The ease with which firms can enter the retail pay TV market helps determine the degree of market power of firms already in the market. The easier entry is, the more existing firms in the market are constrained in their pricing behaviour by the prospect of facing competition from firms not currently operating in the market. Barriers to entry may therefore cause and/or reinforce market power. The Competition Act guidelines, Assessment of market power, discuss barriers to entry in more detail. 3.40 Oftel believes there to be high barriers to entry in the retail pay TV market. The launch of a new digital terrestrial TV platform is not currently possible because of the limited availability of spectrum currently available for digital terrestrial transmission. Although no such restrictions apply to the cable and satellite platforms, Oftel believes other significant entry barriers exist. These are discussed below. 3.41 Cable operators have given up most of their exclusive franchises, but an undertaking which wished to build a new cable network in areas where cable operators already exist would have to face significant costs in building the necessary network and also the costs involved in establishing a sufficiently large population of set top boxes. Similarly, an undertaking which wished to launch an alternative satellite pay TV platform would have to lease the necessary transmission capacity from satellite owners and establish a population of satellite dishes and set-top boxes. Alternative platforms for receiving pay TV may become available in the future. The use of an ADSL network for this purpose has been announced by Kingston Communications and this mechanism may be used more widely. 3.42 In all such cases, however, the costs involved would be significant. An undertaking which decided to launch a new retail pay TV service would have to secure the rights to broadcast channels which would be attractive to consumers. Most importantly of all, many of the costs associated with entering the retail pay TV market, especially those associated with constructing a network and creating a sufficiently large population of reception equipment, would be sunk, ie they could not be recovered if the entrant were to subsequently exit the market. 3.43 An existing operator, which has already invested in sunk assets, does not need to earn as high a rate of return as a potential entrant since the latter has the choice of not entering the market and could avoid incurring all costs if it chose not to do so. The potential entrant also faces the possibility of existing operators decreasing prices in order to lower the margins achievable by a new operator. This adds a significant degree of risk to the entire enterprise. The potential entrant may decide not to enter the market if it believed that the existing operator was likely to respond by cutting prices to such a low level that the entrant would be unable to cover its sunk costs. 3.44 These effects tend to give incumbent operators a so-called ‘first-mover advantage’ and may deter potential entrants from competing in the market. This, in turn, would tend to mean that existing operators are not significantly constrained in their pricing behaviour by the possibility of facing competition from new entrants. 3.45 Oftel concludes that high barriers to entry in the retail pay TV market do exist. This conclusion is supported by the fact that there has not been a great deal of entry into the retail pay TV market in recent years. The only large-scale entrant in recent years has been ONdigital whose service became the world’s first platform for digital terrestrial television when it launched in November 1998. ONdigital now has over 5% of multi-channel subscribers. Countervailing buyer power 3.46 In some markets, the purchasers may have buyer power which could be used to counteract any market power on the behalf of the seller; this is known as countervailing buyer power. However, the retail pay TV customers of cable operators are household consumers, and do not possess any countervailing buyer power. Costs and benefits of open access 3.47 Oftel would welcome comments on whether the expected benefits of mandating open access for the purpose of delivering pay TV are sufficient to justify the costs. In particular, Oftel would welcome information on the likely costs and benefits which could arise from the mandating of open access to broadband cable networks for the purpose of providing pay TV. The following questions may be particularly relevant:
Effectiveness of open access 3.48 In consultation with the ITC, Oftel also needs to consider whether open access is an effective and proportionate regulatory instrument to tackle any obstacles to effective competition in the retail pay TV market. Oftel invites comments on the issue and also welcomes any suggestions for regulatory policies which might be more efficacious. For example, respondents may feel that it is worthwhile for the widespread availability of information concerning the range of services available on different pay TV platforms to be encouraged, since this would allow consumers to make well-informed choices. Respondents may also wish to comment upon what they regard as being the most significant obstacles to effective competition in the retail pay TV market and on how open access would help remove these obstacles. 3.49 The proportionality of open access would also have to be assessed. It may be the case, for example, that any market power enjoyed by cable operators in the market is transitory as a result of market developments, such as the development of alternative platforms. In such a case, an open access obligation may not be a proportionate regulatory remedy to impose since it would be dealing with a short-term competition concern only. Possible detriment to consumers caused by asymmetrical regulation 3.50 Oftel would be concerned if varying arrangements for access to different pay TV platforms proved a barrier to the establishment of effective competition. In theory, such a barrier could arise as a result of the different rights of access to the various pay TV platforms. Although each of the cable networks is closed (in the sense that the operators of those networks has the ability to determine which services are carried over its own network, subject to contractual agreements), this is not the case with the digital satellite platform. 3.51 A wholesaler of pay TV which wished to do so could retail its services direct to household consumers over BSkyB’s digital satellite platform. To do so it would have to lease transmission capacity on a relevant satellite and then obtain conditional access from Sky Subscribers Services Limited (SSSL). This would allow the wholesaler (amongst other things) to encrypt its channels and thereby restrict their reception to paying customers. Transmission capacity on the relevant satellite transmission network is readily available at present whilst SSSL is obliged under the terms of the Class Licence for Conditional Access Services to provide conditional access on terms which are regulated by Oftel. 3.52 In theory, these differing arrangements could create a barrier to the establishment of effective competition. They may, for instance, confer on cable operators market power in providing access to their networks to wholesalers of pay TV. A pay TV wholesaler could gain access to the digital satellite platform using the method outlined above, but a similar mechanism would not be available for the cable platform. Each of the cable operators may be in a position to take advantage of this fact by carrying the programmes of pay TV wholesalers in its retail package only on onerous terms or not at all. 3.53 On the other hand, it may well be the case that a cable operator which lacked market power in the retail pay TV market could not profitably restrict the range of services available on its platform. This is because a pay TV wholesaler which was denied access to a particular cable network could then seek carriage on the digital satellite platform. If the channel was sufficiently valuable to consumers then the cable operator in question would lose subscribers on the grounds that the digital satellite platform was carrying a more attractive service. A cable operator may not therefore be in position to profitably deny access to a channel valued by consumers. 3.54 Oftel would welcome the views of respondents on the likely effects of any distortions which might take place as a result of the differing arrangements for access on the cable and digital satellite platforms. Conclusions 3.55 In assessing the market power of cable operators, Oftel has considered the fact that each of the cable companies has a sizeable share of the retail pay TV market and also the fact that there are significant barriers to entry in this market. 3.56 The Competition Act guidelines, Assessment of Market Power, make clear that "market power describes a situation where the constraints which would usually ensure that an undertaking behaves in a competitive manner are not working effectively." Oftel believes that in the case of the retail pay TV market, the competitive constraints on each of the operators are working effectively and that each of the operators of retail pay TV is constrained in its pricing behaviour by the availability of other platforms for the delivery of pay TV. 3.57 This conclusion is based on the fact that the two main competitors to cable operators in the retail pay TV market are available in the majority of households. If cable operators were to price above the competitive level for retail pay TV or offer a significantly worse service for a similar price, their subscribers would, Oftel believes, be able to switch to other platforms for the receipt of pay TV, both of which are available in the majority of homes. The costs to consumers of moving from one pay TV platform to another (ie the switching costs) would currently be small, since both ONdigital and BSkyB are offering subsidised set-top boxes which are free to household customers (although a fee is charged for installation of satellite dishes). Moreover, for the reasons given in paragraph 3.35, cable operators could not exercise any market power in the markets for premium pay TV. It also seems unlikely that they are able to exercise any market power in retailing of basic pay TV. 3.58 On balance, therefore, Oftel believes that the arguments lead to the view that cable operators do not presently have market power in retailing of pay TV. The fact that there does not appear to be any evidence to show that any of the cable operators is earning supra-normal profits in the retail pay TV market or markets supports this conclusion. 3.59 As cable operators currently appear to lack market power in the relevant market, Oftel does not propose to mandate open access to cable networks. Even if such market power were to develop in the future, Oftel would also need to consider whether the other two tests for open access were satisfied. For this reason, it is seeking the views of respondents on these tests. The views of respondents on Oftel’s analysis and conclusions are welcome. 3.60 Oftel also notes that the OFT is currently carrying out a further review into the position of BSkyB in the pay TV market, during which issues of market definition and market power will be carefully considered. Oftel will co-ordinate its analysis of market power carefully with the OFT and the ITC to ensure that a consistent view is taken of market power in all relevant investigations. 3.61 Whilst this analysis has only considered the pay TV markets, should the cable operators be found to have market power in the relevant markets in the future, Oftel would have to recognise the constraint placed on basic pay TV by the existence of free-to-air services. If an open access obligation were to be imposed in respect of subscription channels, it is Oftel’s current view that such an obligation would also be imposed for access for free-to-air channels. Open access to broadband cable networks for other services 4.1 This chapter discusses whether open access should be mandated for other services likely to be delivered over broadband cable networks. It specifically discusses the position of cable operators in the supply of voice telephony, higher bandwidth services (such as high-speed internet access) and interactive TV services (such as home shopping). Open access for the purpose of delivering voice telephony 4.2 This section discusses whether open access to cable networks should be mandated for the provision of voice telephony services. Oftel believes that cable operators offering these services are in competition with other providers of voice telephony, notably BT. Virtually all subscribers to cable operators’ voice telephony services are in a position to obtain similar services from BT. Oftel believes consumers regard voice telephony from cable operators and voice telephony from BT as substitutes for each other and that the two should therefore be regarded as being in the same market. 4.3 Oftel also believes that each of the cable operators is in the same geographic market despite the fact that each of them is able to offer its services in certain parts of the country only. This is because BT is required under the terms of its operating licence to offer uniform prices for voice telephony across the country. A change in prices by one cable operator which led BT to alter its prices would therefore have an impact on the prices charged by other cable operators. On a chain of substitutability argument therefore (see paragraph 3.25), Oftel concludes that each of the cable operators is in the same geographic market, and that BT is also part of the relevant market.
4.4 Chart 2 shows the percentage of exchange line numbers connected by each of the fixed operators. It can be seen that BT has a significant share of the market for access to voice telephony services. Kingston Communications also has a significant share of the market for access to voice telephony services in the Hull area. Both BT and Kingston Communications have over 80% of direct telephony connections to customers in the relevant geographic markets. Both are therefore regarded as having market power in the respective relevant markets and are consequently obliged to grant ‘indirect’ access rights to competing providers of retail telephony services by means of interconnection arrangements. This allows other companies to offer voice telephony services using their networks which helps to facilitate effective competition in the market for calls. 4.5 The market for calls may not, however, be fully competitive. BT appears to retain a degree of market power. BT’s rate of return in the markets for calls seems to be significantly above the cost of capital, even though there are a number of competitors to BT in the provision of calls. This implies that the markets for calls are not yet effectively competitive. Chart Three shows the percentage of call revenues in the residential sector accounted for by a number of fixed operators. It can be seen that BT has a market share significantly higher than that of the cable operators. 4.6 The recent Oftel publication, Price Control Review – possible approaches for future retail price and network charge controls, published in March 2000, discusses the position of BT in the voice telephony market in greater detail.
4.7 Cable operators have a similar telephony tariff structure to BT. Notwithstanding their much lower market share, it is possible, in theory at least, that cable operators have market power in these markets. They may also be making rates of return on calls which are significantly above the cost of capital. If this were indeed to be the case, the question would arise as to whether this reflected a degree of market power. It may be argued that the barriers to gaining a substantial presence in the domestic calls markets (eg customer inertia, tariff confusion) must be considerable, even if they cannot at this stage be identified precisely. Otherwise BT would not be able to make rates of return in excess of the cost of capital in the calls markets. If such barriers do exist, any undertaking (such as a cable operator) which has managed to establish itself in these markets may possess a degree of market power. 4.8 Oftel’s present view is that it would not necessarily do so. Firstly, where rates of return significantly above the cost of capital exist, the indirect access obligations on BT make them available to any retail telephony provider, whether or not they own a network. Cable operators would therefore be one of a number of operators attempting to reduce BT’s market power, but they would not enjoy any particular advantages over other operators without their own networks, in terms of the prices they were able to charge for calls. Secondly, cable is not unique in having established themselves in these markets and there is no evidence that cable companies are making excess profits from any services, including telephony. Prices above BT’s costs are not reliable evidence of excess profitability of cable companies in providing telephony. 4.9 Moreover, Oftel’s policy is that regulatory controls and/or competition pressures should be used to minimise the areas where operators with market power are able to make rates of return in excess of the cost of capital. It will be addressing the issue in the current BT price control review. 4.10 Oftel’s view therefore is that cable operators do not possess market power in the market for access to voice telephony services nor in the market for calls. Since it has taken the view that the first of the three tests for open access is not satisfied, Oftel has not thought it appropriate to consider imposing an obligation for indirect access to cable telephony networks. 4.11 Oftel would welcome comments on barriers to entry to the retail calls markets and on whether (and, if so, why) those barriers should be easier for a cable operator to overcome than for an indirect access provider. Open access for the purpose of delivering higher bandwidth services The position of cable operators in relation to higher bandwidth services 4.12 As a result of the Access to Bandwidth consultation in 1999, Oftel concluded that regulatory measures in regard to the BT local loop (ie the access network connection between the customer’s premises and the local exchange) were necessary to deliver effective competition for higher bandwidth services. Higher bandwidth services include, inter alia, high-speed Internet access and video-on-demand entertainment. Competing operators and service providers wishing to offer these services to the current BT network will be able to do so in two ways. First, as BT rolls out ADSL over its network, BT will be making available wholesale ADSL capacity on non-discriminatory terms to other service providers and operators. Second, Oftel has decided (see Access to Bandwidth: Delivering Competition of the Information Age, November 1999) that other operators will be able to upgrade the local loop by placing their own DSL equipment in the local exchange and at customer premises. Oftel has proposed that local loop unbundling will be introduced from July 2001 at the latest (see Access to Bandwidth: Delivering Competition for the Information Age, November 1999). 4.13 Cable operators are not yet widely offering higher bandwidth services but all plan to do so within the next few months. In considering the state of competition in the provision of access to higher bandwidth services, Oftel will pay close attention to the development of such services over both cable networks and over DSL networks. 4.14 The Access to Bandwidth consultation found BT to be dominant in the provision of access to domestic households and small and medium sized enterprises (SMEs). Although market shares have changed slightly in the meantime, the conclusion that BT is in dominant in the provision of access to domestic households and SMEs remains valid, as can be seen from Chart Two. As discussed in Oftel’s Price Control Review – possible approaches for future retail price and network charge controls, BT retains high market shares (over 80%) in both the residential and business fixed access markets and the rate at which its share has been eroded continues to be slow. BT’s share of new connections has fallen, according to its own figures, to just over 50%, but this still suggests that BT’s market shares are likely to remain high in 2001 and beyond. 4.15 At present, there is no question of other operators having the same level of market power in the provision of access to domestic households and SMEs. Overall, cable penetration is around 30% of premises, in the areas where cable networks have been built out. In some cable franchises, the figure is much higher. However, even in such localities, virtually all premises have access to a BT line, should they require one. 4.16 In such circumstances, it appears unlikely that cable operators will develop market power in providing access to higher bandwidth services as they are introduced. They might conceivably do so if:
4.17 Oftel believes that different regulatory obligations should be imposed on operators according to the level of market power they possess. If BT were not to be subject to an open access obligation, it would be in a position to leverage its market power into the retail market for higher bandwidth services. For this reason, Oftel believes it is necessary to impose an open access obligation on BT which will allow other companies to offer higher bandwidth services over the BT network. Oftel will monitor developments in the market for provision of access to higher bandwidth services as part of its programme of market segment reviews. If cable operators do develop market power in this market, it will be appropriate to consider whether open access for the provision of the service concerned is justified. The need for reciprocal access 4.18 As discussed in Chapter 2, the availability of different rights of access on different platforms could in theory cause a distortion to the competitive process. It may be necessary to consider the mandating of open access in order to minimise such distortions. 4.19 The fact that BT is supplying wholesale ADSL services to different service providers, combined with continued closed access to cable networks for the provision of higher bandwidth services, may give cable operators market power in providing access to providers of higher-bandwidth services. A higher bandwidth service provider connected to a cable network could gain access to all the customers of that network and BT’s network. BT would be unable to offer a matching service. Each of the cable operators may be in a position to take advantage of this fact by charging service providers an amount above the competitive level for coming onto its network. 4.20 Diagrammatically, the arrangements might be represented as follows:
4.21 The key point is that the arrow between the two Asynchronous Transfer Mode (ATM) switches is one way, so service provider 2, connected to the cable network can access BT’s customers but service provider 1 on the BT network cannot access cable customers. 4.22 On the other hand, the range of services available is likely to be the crucial factor in determining which platform for higher bandwidth services is chosen by consumers. If this were to be the case, operators of broadband cable networks could not, in all likelihood, offer a restricted choice. To do so would provide an incentive for consumers to become BT subscribers. 4.23 Moreover, the cable operator’s ability to raise charges to service providers will also be constrained, since this would tend to lead service providers to BT’s network and consumers would follow. Accordingly, Oftel does not believe it likely that a lack of reciprocal access will lead to competitive distortions | ||||||||
