Contents

The Determination

The Explanatory Memorandum

Relevant Sources

Whereas:

1. On 31^st August 1999, the Secretary of State granted a licence under section 7 of the Telecommunications Act 1984 (the "Act") to all persons defined in paragraph 2 of that licence for the running of the telecommunications systems specified in Annex A to that licence (the "Applicable Systems") and, subject to certain conditions, authorised those licensees to do all or any of such acts specified in Schedule 3 of that licence. The said licence is hereinafter referred to as the Licence;

2. Sky Subscribers Services Limited belongs to the class of persons defined in paragraph 2 of the Licence. Sky Subscribers Services Limited is hereinafter referred to as the Licensee;

3. Part A of Schedule 1 of the Licence contains certain requirements and obligations which the Director General of Telecommunications (the "Director") may impose where the Director has determined the Licensee to be a Regulated Supplier in accordance with the provisions of Condition 9 of Part A of Schedule 1 of the Licence;

4. Condition 9.5 of Part A of Schedule 1 provides that the Director may determine the Licensee to be a Regulated Supplier in a dominant position within the meaning of Article 82 of the EC Treaty in relation to any particular market for the supply of Access Control Services where:

• the Licensee supplies or intends to supply Access Control Services to another person in respect of Relevant Other Telecommunication Services (as defined in the Licence); and
• a Third Party (as defined in the Licence) supplies or intends to supply to the public a Relevant Other Telecommunication Service in respect of which the use of Access Control Services is necessary; and,
• the Third Party has made a reasonable request for the provision to it by the Licensee of Access Control Services; and
• the Licensee is in a position of economic strength 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.

5. On 12 November 1999, the Director served a notice upon the Licensee and interested parties in accordance with paragraph 6 of Part 1 of Schedule 1 of the Licence specifying :

• the Access Control Services which the Director considers are being supplied;
• the Relevant Other Telecommunications Service in respect of which such Access Control Services are or may be supplied;
• how the requirements of paragraph 9.2(a) to 9.2(c) of Part 1 of Schedule A are or may be satisfied; and
• the factors on which the Director has relied in determining the Licensee to be in a position of dominance.

6. On 5 April 2000, the Director published a draft decision and a statement of reasons for that decision in accordance with paragraph 6 of Part 1 of Schedule 1 of the Licence. The Director has considered the representations, observations and comments made by the Licensee and Interested Parties during all stages of the consultation process and has taken them into account in formulating this decision.

Now therefore the Director hereby determines as follows:

7. The relevant market, for the purposes of this determination, is the market for Access Control Services for digital interactive TV services, that is to say the market by means of which the supply to end-users of interactive services designed for use with digital TV receivers (whether or not those interactive services are stand-alone or part of a package of services) is controlled;

8. The Licensee is in a dominant position in the relevant market. The Director therefore determines that the Licensee should be a Regulated Supplier in the supply of Access Control Services for digital interactive TV services; this decision will apply to the extent that the Licensee supplies Access Control Services over the digital satellite platform.

9. Pursuant to Condition 9.7 of Part A of Schedule 1 of the Licence, Conditions 10 to 15 of Part A of Schedule 1 of the Licence come into immediate effect.

Jim Niblett
20 June 2000

A person authorised in that behalf under Section 8 of Schedule 1 of the Telecommunications Act 1984

Explanatory memorandum

Introduction

1.1 On 12^th November 1999, Oftel published a notice of determination (the "Notice"), SSSL as a regulated supplier, that Sky Subscribers Services Limited ("SSSL") is in a dominant position in the market for Access Control Services for digital interactive TV services. This notice was issued under the terms of the Class Licence for the running of telecommunication systems for the provision of Access Control Services, issued on 31^st August 1999 (the "Access Control Class Licence").

1.2 Oftel invited comments on the Notice by 10^th December 1999. Comments were received from 9 respondents. There was then a further period of consultation – which ended on 7^th January 2000 – during which time interested parties had the opportunity to comment on the responses made during the first stage of consultation. Oftel received comments from 2 respondents during this stage of consultation. Oftel published the Director’s draft decision and a statement of reasons for that decision on 5^th April 2000. Respondents were given until 19^th April to comment during which time Oftel received 3 responses. Oftel is grateful to all who have participated in the extensive consultation process.

1.3 This explanatory memorandum explains the reasoning behind the Director’s decision to determine that SSSL is in a dominant position within the meaning of Article 82 of the EC Treaty in the market for Access Control Services for digital interactive TV services in the UK. It also contains Oftel’s views on points raised in responses to the draft decision and statement of reasons.

The Director’s decision

1.4 Having taken due account of responses received during the consultation on the Notice, and those following the publication of the draft decision and statement of reasons, the Director has decided to proceed with the making of the determination. The Director has concluded that, under the terms of the Access Control Class Licence, SSSL should be a Regulated Supplier in a dominant position in the UK market for Access Control Services for digital interactive TV services.

The reasons for the Director’s decision

1.5 The Director has made this decision on the basis of the information available to him.

1.6 Representations and observations made during the consultation process have not altered the Director’s conclusion that SSSL is in a dominant position in the UK market for Access Control Services for digital interactive TV services. This conclusion was reached following an assessment of the relevant market. The results of that assessment were published in the Notice.

1.7 The assessment of market power published in the Notice found that SSSL’s substantial market share of the relevant market for Access Control Services, combined with the significant barriers to entry in this market, provided it with a high degree of market power. On this basis, it was concluded that SSSL is in a dominant position in the UK market for Access Control Services for digital interactive TV services.

Oftel’s response to points raised in response to the draft decision and statement of reasons

Market definition

1.8 Respondents have commented on the definition of the market used in Oftel’s analysis. As explained in the Notice, the Director considered whether there is a separate economic market for Access Control Services for digital interactive TV services supplied in the UK using the approach to market definition, commonly referred to as the ‘hypothetical monopolist test’, further details of which are given in the Competition Act guidelines, Market definition. This approach considers the constraints placed on the price-setting behaviour of a hypothetical monopolist supplier of the service in question. This takes into account the existence of both demand and supply-side substitutes. If customers could readily switch to another service with similar characteristics this would constrain the ability of the hypothetical monopolist to sustain a small, but significant, price increase. A similar constraint would apply if suppliers of other services could readily switch production into the service supplied by the hypothetical monopolist. The relevant economic market includes any such demand and supply-side substitutes.

1.9 On the basis of demand-side and supply-side substitutability, the Director concluded in the Notice that there was a separate economic market for Access Control Services for digital interactive TV services. The Director believes the definition of an economic market for Access Control Services for digital interactive TV services continues to be valid on the grounds of demand and supply side substitutability, for the reasons set out in the Notice.

1.10 In defining the relevant market for Access Control Services, Oftel has also made use of the market definition used by the European Commission in its ‘BiB decision’ ie the Decision of 15 September 1999 relating to a proceeding under Article 81 of the EC Treaty [Case IV/36.539, British Interactive Broadcasting/Open] (1999/781/EC). The BiB decision stated that there is a separate economic market for digital interactive TV services in the UK.

1.11 The Director is obliged under the terms of the Access Control Class Licence to have regard to any relevant decision of the European Commission. The statement of reasons pointed out that the BiB decision was both relatively recent and could hardly be more relevant. The Director has also taken into account the fact that the market definition used in the BiB decision was arrived at after the Commission contacted British Interactive Broadcasting’s main prospective customers and the main companies in the industry to ask for their views about the boundaries of the relevant market.

1.12 Notwithstanding the Director’s obligation to have regard to any relevant decision or statement of the European Commission, certain respondents have argued that this market definition is too narrow and should be revised in the light of developments in the market since the BiB decision was published. The Director acknowledges that the market is evolving, but he believes that the facts on which the Commission based its analysis in the BiB decision continue to be valid and that it is therefore appropriate to use the definition of an economic market for digital interactive TV services for the purposes of this determination.

1.13 Whilst the Director has used the definition of digital interactive TV services cited in the BiB decision for the purposes of this determination, he acknowledges that future developments might have an impact on this market definition, given the relative novelty of digital interactive TV services. He may review whether the definition of an economic market for digital interactive TV services continues to be appropriate in his market segment review in the first half of 2001. The Oftel publication, Proposals for implementing Oftel’s Strategy: 2000/01 Management Plan, published in April 2000 describes Oftel’s intentions in this area, whilst the Oftel strategy statement: Achieving the best deal for telecoms consumers, published in January 2000, provides more details of market segment reviews.

1.14 Using the definition of a UK market for digital interactive TV services in order to define the end-user market, the Director has identified the relevant market for Access Control Services (ie the relevant intermediate market) as the market for Access Control Services for digital interactive TV services in the UK. Oftel’s Draft Guidelines on Regulated Supplier determinations, published in July 1999, provide more details on the distinction between end-user and intermediate markets.

1.15 In its representation on the Notice, SSSL argued that the definition of digital interactive TV services only included packages of interactive services and not stand-alone interactive services. In the statement of reasons, the Director dismissed this argument, and expressed the view that such a definition would have "perverse consequences" since it would effectively mean that the same consumer offering provided in different forms (ie as a stand-alone service and within a package of interactive services) would be regarded as being in separate economic markets.

1.16 One respondent to the statement of reasons nevertheless expressed the view that the relevant market for digital interactive TV services includes only packages of interactive services. The Director reiterates the point made in the statement of reasons: he does not agree with this market definition. Nor does he believe that a thorough reading of the BiB decision would lead to the conclusion that it was the Commission’s intention to define such a market.

1.17 In any case, under the terms of the Access Control Class Licence, the relevant market in which SSSL’s market power should be assessed is the relevant market for Access Control Services. The Director believes that the relevant market for Access Control Services includes both Access Control Services provided to suppliers of stand-alone interactive TV services and those provided to suppliers of packages of interactive TV services.

1.18 The Director has not seen any convincing economic argument which would suggest that a market for Access Control Services for packages of digital interactive TV services would be separate from a market for Access Control Services for stand-alone interactive TV services.

1.19 The scope of the decision therefore covers the Access Control Services for digital interactive TV services (ie both packages of interactive TV services and stand-alone interactive TV services) which SSSL is supplying over the digital satellite platform.

1.20 The Director believes SSSL is currently supplying the following types of Access Control Services over the digital satellite platform, all of which are defined in the Access Control Class Licence:

• Message Processing Services (in particular, in order to allow digital signatures to be attached to applications);
• Authentication Services (in particular, in order to allow specific interactive services to be accessed from a specific receiver);
• Access Device Management Services (in particular, a service to prevent an application which does not have an appropriate digital signature from running on the consumer’s receiver);
• Selection Services (in particular, the ability to access interactive services via an Electronic Programme Guide);
• Subscriber Management Services (in particular, the preparation of smart cards so that the consumer is able to access interactive services).

Market power

1.21 In one response to the draft decision and statement of reasons, it was argued that Access Control Services are embryonic services and that consequently the high market share of SSSL had limited relevance. The Director acknowledges that Access Control Services are relatively new offerings, but he believes that SSSL’s high market share in the provision of these services will persist for the foreseeable future and that this confers on SSSL a dominant position in the relevant market. The reasons for that assessment are set out in the Notice.

1.22 The Director has indicated his intention to conduct a market segment review in the market or markets for Access Control Services in the first half of 2001 (see Proposals for implementing Oftel’s Strategy: 2000/01 Management Plan). Details of these market segment reviews are given in the Oftel strategy statement: Achieving the best deal for telecoms consumers. The Director might then be in a position to assess whether SSSL’s current dominant position continues to exist.

1.23 Respondents have expressed concern that the decision will result in inappropriate regulatory intervention in emerging markets. Oftel has stated clearly that its strategy is to withdraw from regulation wherever effective competition is able to provide quality, choice and value for money to customers. Oftel is happy to continue existing dialogues on this issue with industry players in the context of the market segment review.

Platform specific markets

1.24 One respondent expressed concern that "the Director General might wish to go further and define platform-specific markets for interactive services". Another respondent expressed similar concerns and argued that definition of such a market would produce "distorted positions of market power giving rise to regulatory obligations disproportionate to the actual market power held by a licensee". The Director has not expressed any intention to define platform-specific markets for interactive services. The Notice made the point that definition of platform-specific markets for Access Control Services would merely reinforce the conclusion that SSSL was in a dominant position in the relevant market for Access Control Services.

1.25 The Director does not believe that it is possible to conclusively decide at this stage whether or not there are platform-specific markets for Access Control Services used to provide interactive services given the relative novelty of such services. In any case, the issue is not relevant in the specific context of this decision: as pointed out in the Notice, the strength of SSSL’s market power would be found to be greater if Access Control Services delivered over each platform were to be found to constitute a separate economic market.

1.26 The Director may consider the issue of platform-specific markets further in his market segment review which is due to take place in the first half of 2001. This market segment review will consider whether any form of regulation in the area of Access Control Services is necessary (and, if so, in what form) in order to ensure that consumers obtain the best possible deal in terms of choice, quality and value for money.

Relevant sources

Competition Act guidelines, Market Definition

Class Licence for the running of telecommunication systems for the provision of Access Control Services, August 1999.

European Commission, Decision of 15 September 1999 relating to a proceeding under Article 81 of the EC Treaty, [Case IV/36.539 – British Interactive Broadcasting/Open),(1999/781/EC).

Oftel, Draft Guidelines on Regulated Supplier determinations, July 1999.

Oftel, Proposals for implementing Oftel’s strategy: Management Plan for 2000/01, April 2000.

Oftel, Oftel strategy statement: Achieving the best deal for telecoms consumers, January 2000.

Oftel, SSSL as a regulated supplier, November 1999.

Oftel, Draft decision and statement of reasons on the Director General’s intention to determine that Sky Subscribers Services Limited is in a dominant position under the terms of Condition 9 of the Class Licence for the running of telecommunications systems for provision of Access Control Services, issued on 31 August 1999, April 2000.