BREMA Response to the DCMS - DTI Consultation Communications Reform White Paper

ANNEX to the BREMA response 28^th June 2000

Introduction

1. This response does not propose specific government or regulatory action; which is a matter for government. Rather it draws attention to the issues that need to be taken into account in planning the development of digital television, which will be a central aspect of the proposed White Paper. Many of the issues raised are inter-linked and therefore repetition in our response is inevitable.

The Core Free-to-Air Services

2. BREMA understands the government’s position of not favouring any single transmission medium for delivering digital services. However, the government has set a target that analogue terrestrial television will not be switched off until the vast majority of viewers are able to receive the digital Qualifying Services.

3. Since the start of digital television in the UK in the autumn of 1998 the growth of digital television has proceeded rapidly so that by the end of 2000 it is estimated that nearly 30% of UK households will be receiving digital television

4. The expectation of the great majority of viewers is that these terrestrial free-to-air services will continue for the foreseeable future and will be paid for either by advertising or by the licence fee.

5. The current universal access to the free-to-air services of the Public Service Broadcasters through terrestrial reception, provides the necessary foundation to encourage migration to the new digital terrestrial services and we have recommended that this should be set as a coverage objective for digital terrestrial broadcasters. We very much support the government’s wish to extend the roll-out beyond 90% as quickly as possible.

6. We believe that there will be an expectation that at least 99% of the UK population should have access to free-to-air digital terrestrial television. Reception of satellite television can not be received by 100% of the population due to a number of factors (layout of buildings; terrain; planning permission). Regional coverage is much more difficult on satellite, moreover reception by receivers with set-top aerials is not possible.

7. The consumer electronics industry has welcomed pump-priming investment that has been made by way of subsidies from subscription service providers. But the policies by BSkyB and ONdigital go well beyond pump-priming and have increased STB subsidies so that the perception of the consumer is that these products are free. This causes a major distortion in the market. With the inevitable manufacturing cost premium idTVs are put at a significant competitive disadvantage. The service providers may well find, as with mobile phones, that the subsidy becomes a permanent expectation of the market. It is not known what impact this cost disadvantage will have on the lift-off of idTV sales and the dis-incentive for manufacturers to invest in the UK market.

8. After more than fifteen years of subscription cable television and ten years of satellite television, providing forty or more channels, only 33% (13% cable, 20% satellite)* of viewers have chosen to opt for subscription services.

9. Where viewers have, and by implication will have paid for, the fullest choice of programmes, (eg via must-carry on cable), a breakdown of viewer preferences shows that the free-to-air channels represent 83%* of those most watched.

(* Source: ITC Research Publication "Television: The Public’s View 1998".)

10. It is possible that those customers who wish to subscribe to services might see no justification for purchasing an idTV receiver. It is further possible that the remaining estimated 40%, who only wish to receive free-to-air services, may still be tempted to purchase subsidized equipment, if the cost of the subscription commitment is less than the idTV premium. In such an eventuality there would only be a small market for idTV and a market could develop for low cost monitor-type products which would not contain significant signal processing features, to be used in conjunction with a subsidized STB. Such products are not an attractive proposition for UK manufacturers.

11. The above implies, as suggested in paragraph 9, that subsidies may become a permanent expectation of the market. However it may well be that once the subscription market has reached saturation (eg: 60%) that the element of subsidy, when compared with the return, will no longer be justified.

12. The subsidized route has many advantages for the subscription service provider. Vertical markets maximize control and disadvantage the competition. Lucrative service upgrades are more straightforward, possibly to the detriment of interoperability. The Commission has recognized this in its Communication Review.

13. In a vertical market there is profit for the subsidizer to move to low cost OEM suppliers.

14. The above aspects may restrict consumer choice. They may constrain free-to-air service providers, who will become dependent on subsidized products. They will have a long term impact on the retail trade including a general devaluation of consumer electronics.

15. Current sales of analogue and digital reception equipment, even when subscriber equipment is seemingly free, show that analogue still dominates the market. In a climate where digital receiving equipment is identified with subscription, it is clear that many viewers who wish to receive only free-to-air may continue to purchase analogue receivers.

16. idTV receivers achieved sales of about 30,000 in 1999. Current estimates this year are in the region of 170,000, although monthly sales so far have been of the order of 6000. The introduction of ONdigital’s conditional access module, BSkyB’s promotion of idTV receivers, and the growing volume of digital 16:9 Widescreen programmes being broadcast, should help to raise sales growth of idTV receivers. A much wider range of idTV receivers (30 models) is now available.

17. However, a record number of 5.5 million analogue television receivers were sold in the UK in 1999, including 842,000 Widescreen television receivers. There is every prospect that this record will be at least equalled in 2000. While we should all welcome the change of format from 4:3 to 16:9 now taking place, the legacy problem of analogue television receivers continues to grow.

18. Such a market is likely to continue and many viewers may not be coerced into obtaining digital free-to-air if the only economic option for digital equipment is via subscription. In theory, set-top boxes should be available with the viewer not being obliged to subscribe, but they do not then receive the benefit of the subsidy. In practice such arrangements are difficult if not impossible to obtain.

19. In the table following we show how the market is developing and how it might continue. However, a number of factors need to be considered and actions taken now, otherwise there is a risk of the pay-TV market reaching saturation at 60% of UK TV households; and the remaining 40% of households, those who may want free-to-air only and be tempted to remain with analogue terrestrial television. It is important that the current momentum of digital television take-up is not lost. Hence, this consultation is vital in identifying measures to be taken now to sustain this momentum.

ANNUAL SALES

20.A continuing analogue market will make it politically impossible for analogue to be closed down.

21. Developments in the UK will have an impact on, and may provide a model for, the continental market.

22. These developments could have an impact on the broader development of multimedia services and products by imposing technologies and limiting interoperability. Similar developments will arise with cable, with huge planned further investments, and the growth of the Internet.

23. It is accepted, of course, that the Government would not wish to interfere in the market. But it may concern them that dis-incentives for the consumer to buy terrestrial free-to-air idTVs could impact upon the public service broadcasters, who increasingly would be dependent on the hardware supplied by subscription service providers.

Set-Top Reception

24. In relation to near-universal availability, this must be provided, in so far as economically feasible, by terrestrial broadcasting to enable, amongst other things, portable television reception. In this sense "portable" should be taken to include the majority of individual television installations which currently use a set-top aerial. The requirement for set-top aerial reception will place considerable demands on service planning, the use of spectrum and product design. Set-top reception is, of course, not possible with satellite. Domestic redistribution of signals, via cable or radio, is feasible but will add cost.

25. It is understood that the ITC sponsored Genesis project will create the environment for universal digital coverage to 99.4% of the population. BREMA believes that this should include reception on portable indoor aerials. This automatically implies that digital terrestrial television has to achieve full coverage. It should be noted that of the current annual 5.5 million sales of analogue TV in the UK, around 45% is for 14" portable sets. Although technical solutions could provide local re-transmission of the digital signals within a domestic installation (eg via local cable or radio), they cannot be relied upon to provide low cost solutions to the problem of reception without a rooftop aerial. The expectation of the public is that at least all the existing analogue channels should be available in digital. If a customer currently uses a set-top aerial to receive their signals, they will have the same expectations for digital services.

26. Evidence suggests that many multiple occupation homes (flats/bed-sits, etc) use set top aerials as their primary source of TV signal. These viewers must also be considered when preparing the switchover plan.

28. Even in those homes with a subscription TV receiver as the primary viewing source, the problem of second/third TV sets remains. It seems highly unlikely that a multi-service central receiver/distribution unit would be provided to allow different sets to view different programs at the same time. Even if it was available, it could be expected that the customer would have to pay more than a single monthly subscription for this facility, making it an unlikely method of increasing the penetration of digital TV.

Interoperability

29. As the Voice of the Viewer and Listener said on 17^th June 1999 "Open standards would also give others the opportunity to produce improved services for particular groups such as sub-titling for the deaf and auditel for the blind plus, of course, multi-lingual audio tracks. Integrated television sets must therefore include the common interface or, if a different interface is used manufacturers must include an adapter and publish the full specifications and make them available on fair and reasonable terms. In other words, no unpublished proprietary add-ons or variants should be permitted that prevent access by third party manufacturers or service providers".

30. Receiver equipment for all services is now available. This includes set-top-boxes, idTV receivers with embedded conditional access and open-standard idTV receivers. Open standard idTV receivers are essential to the move to digital as these automatically provide for free-to-air services and, by means of a plug-in module can be upgraded to subscription services. These comply with the DTI’s Compliance Guidance on the Advanced Television Services Regulations 1996, revised in June 1999. These regulations will need to be amended in line with the outcome of the EU Commission activity on regulation, which will need to take into account the EACEM comments, attached

Video Recording

31. A further additional requirement is the availability of a replacement for, or alternative to, current analogue video recorders. At the moment there at least twenty-five million video recorders in use, growing annually by two million. These will continue to function after switchover, when connected to the analogue outputs of digital receivers. However, in this mode they are not able to receive and record programmes other than that to which the digital receiver is tuned. Video recorders will continue to be capable of re-playing into the analogue inputs of digital receivers. There are a number of new technologies available and developing that provide for digital recording and which will offer considerably more facilities than are available at present. However, market opportunities have yet to be precisely identified and developed.

32. There are significant implications for the development of digital television arising out of copyright. The draft EU Directive on copyright is likely to be adopted by the European Parliament by the end of 2000. The current text is a less than satisfactory compromise, which will do little for harmonization across the European Union and leaves much to be interpreted in implementation legislation by individual Member States.

33. Digital television brings a much broader range of services including interactive pay-per-view and video-on-demand; and new ways and technologies of recording are being developed.

34. It is important that government and industry establish working arrangements to address the complex issues which will bring increasing pressure on the means of interpreting copyright issues in light of the impending directive. Not to do so risks stalling the progress of digital television.

Switchover

35. In the scenarios described earlier, some manufacturers or importers may decide to continue to supply the established analogue TV market. This would impact on analogue closedown.

36. Analogue products will also continue to have a market in those geographic areas not covered by the multiplexes which the consumer wishes to access.

37. Subscription TV services on terrestrial, satellite and cable will become an increasingly important factor for viewers. However, as has been reported earlier, after fifteen years of subscription cable television and ten years of satellite television, currently only 30% of UK households subscribe to subscription TV. This may almost double in the digital era. But this will still leave about 40% of UK households who only wish to have the free-to-air public services for which they pay a licence fee.

38. The launch of digital television in the UK has been especially successful in the take-up of subscription TV. Published information shows that there are already over four million digital television subscribers. This remarkable success has brought almost instant awareness of digital television throughout the UK. However, other than those now enjoying digital television and those in industry, there is much confusion and lack of knowledge regarding the new free-to-air services.

39. We therefore very much welcome the initiative of the Department for Culture, Media and Sport to lead a public information campaign to explain the full range of the benefits of digital television to everybody. This will require considerable emphasis on the free-to-air services of which most viewers remain unaware or confused. Clearly the public service broadcasters, led by the BBC, have a key part to play in vigorously developing and promoting new and attractive free-to-air programmes and services.

40. A rapid development of the market for free-to-air idTV will bring forward the date that such products become the normal replacement for analogue television receivers. This market, of some five million a year, is much greater than any likely subscription market and will drive the on-cost of digital more rapidly downwards to one that is much lower than the cost of a non-subsidized set-top box.

41. Moving the replacement television market to digital is the surest way of being able to bring forward analogue switch-off. Indeed whilst there is a continuing analogue replacement market it may never be possible to switch off analogue

42. It would be reasonable, in the autumn of this year, for government to set out the criteria that will be used in determining a switch-off date. This would provide the opportunity for consultation and a valuable feed-back. Frequency planning studies for the extension of digital terrestrial coverage are currently under way and will provide options for further evaluation.

43. If the barriers to switchover are correctly identified, addressed co-operatively by all interested parties, and assuming that the resolution of these issues can be satisfactorily communicated to, and understood by the public, then switchover is feasible within a decade. However, public confidence must have been established well within the first half of this decade so that there will be complete confidence when purchasing equipment.

44. Even assuming that all of the above mentioned barriers can be overcome, there are bound to be a significant number of viewers who, for whatever reason, will not have taken up digital by the switchover date. As stated above the analogue option will, for them, remain the inexpensive option. If the inevitable cost differential, which at a minimum relates to IPR, is closed either through subsidy or tax breaks then it can be expected that the normal replacement cycle will ultimately complete digital take-up. If this process is to be further accelerated, analogue viewers will need to be provided with the incentive of free upgrades, the cost of which can only be met by commercial subsidy and government financial incentives, both of which could be related to potential revenue from spectrum auctioning.

Cost

45. The key aspect of the switchover is the availability of the open-standard idTV receiver and its cost, both in absolute terms and also relative to other digital hardware offers. It must be appreciated that whilst the industry is fully committed to digital TV and a competitive market, the cost of equipment depends on a number of external factors. One is the size of the market; economies of scale will apply both to the finished product and the components used. Potentially the market extends to the rest of Europe and internationally, depending on system harmonisation which is being facilitated by the DVB.

46. However, the manufacturing cost of an idTV as a mass market product can never be lower than the equivalent analogue receiver. This will also be the case after switchover when it will no longer be necessary to include an analogue front-end. The inherent additional costs of digital relate to extra processing and memory and interactivity (modem). Of course, this premium will reduce in time, but a factor that cannot be altered is IPR which adds a further estimated £33 to the retail price. Similar economic considerations apply to unsubsidized set-top boxes. Talk of digital converter "bricks" of very low cost needs to be re-assessed in this light.

Manufacturer Confidence

47. A significant barrier to manufacturers entering the digital market is uncertainty. Since it is impossible to achieve all of the Government pre conditions, (unless the barriers identified in this consultation process are removed) then the time scale and eventual switchover are in question. In these circumstances, and particularly in light of the cost factors mentioned above, manufacturers must think very carefully before significantly investing further in development and manufacture of digital television.

48. A further factor, in attracting manufacturers to the market is the degree to which it has commonality with markets in Europe and elsewhere. It is therefore essential to maximise international harmonisation of product design, based upon open-standards that are multi-platform applicable or compatible, and that do not tie products to the services of specific vertical operators.

Regulation

49. The regulators must have sufficient powers, particularly with respect to extending terrestrial coverage and to ensuring interoperability and programme quality. It is for the regulators to consider whether they have sufficient powers, particularly in light of the European Commission’s proposals regarding a common regulatory framework for electronic communications.

50. Tight regulatory control is not required in most areas except as regards ensuring interoperability and ease of movement between digital platforms eg: satellite to terrestrial. Further powers may be required to ensure the necessary operational compatibility as well as vigilance in exercising the existing powers.

51. If a new regulatory structure is to be proposed, this must maintain the experience and ability that has been demonstrated by the ITC. Furthermore, broadcasting must continue to be seen as a unique medium and not merely one technology in the generality of communications.

52. Public Sector - Modernizing Government

Government has taken a number of initiatives to enfranchise the public through digital technology. It has recognized that, "through interactive services digital TV has the power to transform the way citizens access public services". Digital television is also the key to convergence of new technologies and services. The concerns that have been raised in this paper must be addressed and resolved if these ambitions are to be realized.

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BREMA 28 June 2000