Annex: OTHER QUESTIONS RAISED BY THE ISSUES PAPER

Impact of technological developments

The Government has recently announced proposals to make spectrum available for new digital terrestrial 'multiplexes' which will carry a variable number of channels. Sky has also announced that it has plans to launch digital services in its next financial year (July 1997 to June 1998). Cable companies will also be upgrading their networks for digital over the next few years.

Digitalisation will create capacity for many more channels than are presently available. This additional capacity may not however remove capacity constraints - we understand, for example, that there are only seven transponders on the Astra satellites still available. Digital terrestrial television will also be subject to capacity restraints - although these may be relieved somewhat once spectrum currently allocated to analogue broadcasting can be reallocated. Much of this additional capacity may be accounted for by Near Video On Demand (NVOD) - one film showing across a number of channels with staggered starting times.
Digitalisation will not, in itself, remove the potential for organisations to acquire market power through the acquisition of gatekeeper roles - these include control over access to transmission networks, conditional access and subscriber management.

Conditional access

The issues paper asked about the prospects for the development of alternative conditional access systems for digital. There is of course more than one system operating in Europe however most consumers have fixed dishes with one set top box and are effectively locked into one system.

No one knows whether this situation will be reproduced as analogue services are replaced with digital. There has been some discussion about the option of building in a 'common interface' into the set top box (or into the television) to enable the consumer to change between encryption systems by changing a plug-in module. There is some argument about whether this approach would involve significant additional costs over those for a equipment dedicated to one encryption system. There may however be compensating advantages which would outweigh any additional costs. Its flexibility allows encryption systems to be upgraded more easily which has advantages for both consumers (their equipment is relatively 'future-proof'); for the conditional access system operator (if the encryption system is beaten by hackers the option exists to change it); and for manufacturers (eg in facilitating the achievement of economies of scale) and reducing possible consumer resistance.

No one knows therefore which way the market may go although there are encouraging signs that a common interface will emerge as the favoured approach. Competing conditional access systems would certainly be the ideal solution but it may however be that development is on the basis of a single dominant system in each country. If this is the case then this would highlight the importance of competition in the provision of subscription management services.

The Government recently announced proposals for the regulation of conditional access for digital television services. These intention is to ensure that conditional access and subscriber management services are made available on fair reasonable and non-discriminatory terms. The licences would also prohibit the operators of conditional access systems requiring the use of their subscription management services as a condition of use of the encryption system.
The Government's proposals are welcome however it should be noted that conditional access is one single link in the chain - all other things being equal - the regulation of conditional access on its own is not enough to guarantee effective competition in digital services.

The proposals do not however cover conditional access systems for analogue services This omission may not however be of long term significance as current analogue satellite services are likely to 'migrate' to digital within a fairly short period (because of the cost of running two systems in parallel). Analogue satellite services may therefore quickly cease to be of importance along with the supporting conditional access systems.

Impact of pay-per-view

Pay-per-view represents uncharted territory - although we believe it will be part of the pay-TV market. One of the issues will be whether this might, to some extent, replace sports channels - at least for certain key events. This might in turn weaken the role of the channel packager as an intermediary. The existing operators of premium sports channels will be anxious to exploit the opportunities for pay TV (and to make sure they do not allow competitors) to steal a march on them. At the same time they will be anxious to ensure that PPV does not 'cannibalise' revenues from existing premium channels.

On the other hand we can be certain that access to a subscriber base and sophisticated billing and transaction-handling capabilities will be essential for the success of PPV. This will if anything reinforce the potential market power of those who control distribution networks. This will be even more true of impulse pay per view. This will involve the use of a modem incorporated in the set top box to enable the subscribers to request access to programmes and have their entitlement immediately authorised. The 'return path' opens up a large number of other commercial opportunities - from instant response to advertisements to Internet access.

Intellectual property rights

The issues paper asks about the potential conflict between the desirability of competition and the freedom of owners of intellectual property rights to exploit them to maximum advantage.

It is recognised that this is a controversial area and, from our experience in telecoms regulation, we know that careful judgement is often required on the balance between promoting competition and fostering innovation. Nevertheless the broad principles seem to be clear. While the existence of the core elements of an intellectual property right (primarily the right to reward) should be preserved, the exercise of intellectual property rights should be at least potentially subject to competition law.

Under Community Law intellectual property rights arise under the national laws of each Member State. National systems of property ownership are guaranteed by the Treaty of Rome. Partly for this reason, the European Court has been cautious about limiting the scope of national intellectual property rights. The majority of ECJ cases have concerned the misuse of national intellectual property rights to compartmentalise national markets. In applying the competition rules the European Court has found that even where the holder of the intellectual property right is in a dominant position, the exercise of its intellectual property right to protect the 'object' or 'subject matter' of the right does not, in itself, amount to an abuse of dominance. Based on judgements of the European Court it is clear however that in certain, albeit possibly limited cases, the EC competition rules, in particular Article 86, may cut down the scope to exercise an intellectual property right, for example:

(1) where an intellectual property right gives rise to a dominant position only where exercised with other advantages (Magill);

(2) where an undertaking owns a bundle of intellectual property rights (such as a portfolio of patents) and one patent is essential to a particular process and refusal to licence it blocks other parties developments;

(3) where intellectual property rights have been acquired (rather than developed internally) with the object or effect of eliminating competition (Tetrapak);

(4) where patents or other rights are pooled or controlled by a single undertaking which controls a bottleneck;

(5) where a licence to the intellectual property right is indispensable to the development of a downstream product and the licensee becomes dependent on the holder of the intellectual property right (the doctrine of 'dependence' - see also IBM undertaking to the EC Commission in 1984).

The misuse of intellectual property rights was recently raised in the British context in the MMC's investigation and report on video games which examined the possible abuse of market power derived from the exercise of intellectual property rights in the form of exploitative pricing achieved through anti-competitive practices, particularly through licensing agreements placing restrictions on third-party software publishers and refusal to allow rental of the product.
The question of the approach to sport and other premium programming rights needs , in our view, to be seen in the context of dominance and whether the refusal to licence rights may be an abuse of that dominance. There seem to us to be three aspects to this:

• the fact that Sky is at present the only source of supply for major premium sports channels upon which the cable companies are dependent for a significant element of their business;
• whether through the assembly of rights to a number of sporting events or feature films Sky is or becomes dominant in a relevant market and if so whether the acquisition of further rights, or the refusal to licence rights already held, might be used to unfairly restrict or prevent competition or constitute an abuse of dominant position;
• Sky's potential to use its dominant position in the wholesale market for the supply of premium channels (although this cannot be taken in isolation from its market power derived from its other gatekeeper roles) to leverage its position in other parts of the market eg in non-premium programming, or in the retail market.
  

This framework may provide a useful guide to approaching issues such as the a possible withdrawal of Sky sports programming if a cable exclusive channel were launched. In a situation where cable operators had a subscriber base equivalent to Sky's DTH subscriber base, and were able to bid on equal terms for sports rights then the existence of a satellite-only channel competing with a cable-only channel might well not raise concerns. However, given Sky's market position and first-mover advantages, there might well be good grounds for considering such a withdrawal as a pre-emptive strike designed to forestall competition. A judgement would need to be made in the circumstances of the time.