Joint Committee on the Draft Communications Bill Minutes of Evidence


Memorandum submitted by Telewest Broadband

A  INTRODUCTION

A.1  Overview of Telewest

  Telewest is a FTSE 200, UK registered, company with business activities solely in the UK communications market. Currently the Company employs a total of 10,000 people and over the past decade has invested over 6 billion pounds to build a state of the art communications infrastructure from scratch, without any public subsidy, which has the potential to serve 4.9 million UK homes.

  Through our wholly owned subsidiary, Flextech Television, we are the largest supplier of basic tier television channels to the UK multi-channel market. Our wholly owned channels include Living TV, Bravo, Trouble and Challenge?. We are also the BBC's 50:50 partner in the joint venture, UKTV, which currently produces 9 television channels, including UK Gold, UK Horizons and UK Drama. Our national television brands, which are licensed and produced solely for the UK market, attract over 21 million viewers.

A.2  Role of foreign ownership in development of UK cable

  This substantial investment has only been made possible by the previous Government's decision to lift restrictions on foreign ownership of cable back in the late 1980s. By taking this step and creating the conditions to attract speculative investment, the Government at the time managed to overcome the shortage of available funding in British cable by allowing North American cable companies to enter the UK market to compete with BT's monopoly. In other words, much of the cable industry's progress during the 1990s was achieved as a direct result of foreign investment.

A.3  Challenges for OFCOM

  Over the next decade, similar levels of private sector investment will be required in support of Government's broadband and digital broadcasting objectives and, therefore, the proposals to lift foreign ownership restrictions are appropriate. More importantly, however, there will be a need to establish an approach to sector regulation that allows the market to work as effectively as possible and the Communications Bill should set the appropriate framework.

  We believe that the challenge can be summarised under the following headings

    —  How OFCOM's duties are prioritised

    —  How OFCOM interprets its powers

    —  How quickly OFCOM will be able to assemble the necessary skills/resources required.

    —  How effectively OFCOM handles competition cases, including those involving public service broadcasters

    —  How OFCOM handles the issues of access, interconnection and interoperability—which will be essential to the effective operation of the supply chain, from consumer equipment through access networks and systems to content and service creation.

  It is against this background that we comment below on the themes listed in the Committee's Press Notice 2 calling for evidence.

B.  THE PROPOSED STRUCTURE, FUNCTIONS, DUTIES AND POWERS OF OFCOM

B.1  OFCOM's priorities

  Since OFCOM will have a pivotal role in translating Government objectives into reality, notably in relation to broadband and digital broadcasting, we believe that its primary responsibility should be to create an 'investment friendly' climate where the market will operate effectively, in consumer interests, to provide the increasing range of services being demanded. We note that Article 8 of the new European Framework Directive provides for national regulatory authorities 'to encourage efficient investment in infrastructure and promote innovation'. This requirement applies equally to content and services investment and is fundamental to broadband and digital objectives. We believe that such provisions should be more explicit within the Bill under Section 3 of Part 1 (General Duties of OFCOM).

  Notwithstanding its responsibilities to protect the interests of consumers, if Government wants the UK to be a G7 leader in broadband by 2005 (and digital by 2010), the investment climate in the UK ought to be as good as, if not better than, other G7 countries over that period, particularly as they all G7 countries have similar objectives.

B.2  Interpretation of powers

  Therefore, we welcome the intent of the draft Bill to encourage inward investment and to provide OFCOM with flexibility in the way that it achieves its goals. However, much will depend upon how OFCOM interprets the various provisions of the legislation (and how European Directives are transposed). In this respect, the approach of the Chairman, Board, CEO and other Directors will be critical, as will the structure of OFCOM.

  If we are to establish a regulatory environment that will cause the necessary private sector capital to be attracted, and assist the market to meet Government's key objectives, OFCOM will need to:

    —  regulate for convergence—not just for today but for the future generations of users and services;

    —  understand the supply chain economics/dynamics and recognise that regulation in one part of the chain can have a knock-on effect on other parts of the chain;

    —  ensure content can be accessed over different platforms, which will require an understanding of the dynamics of interconnect and interoperability;

    —  regulate all players consistently, including public service broadcasters, in line with market power, and act quickly against anti-competitive behaviour;

    —  understand the effects of non-sector specific regulation on the achievement of objectives.

B.3  Competition Act powers

  In terms of the need for quick action against anti-competitive behaviour, we understand the arguments for providing OFCOM with concurrent competition powers and have supported this position historically. However, experience since 2000, with Oftel sharing powers with the OFT, has not brought the improvements that were expected. This may be because the relevant skills are spread between Oftel and the OFT, rather than consolidated, and this may have worked against concurrency being effective. Given that telecommunications is an industry with many market entrants, many types of services and a dominant incumbent, it is surprising that, over two years, Oftel has failed to find any actions contrary to the Competition Act. In the same period, the OFT has found breaches of the Act in industries as diverse as bus services, pharmaceuticals and local newspaper supply. The OFT has also announced preliminary decisions in a range of other industries including pay TV and toy distribution.

  Assuming that the provision of concurrent powers to OFCOM is the preferred option, there is a need to consider the how the following issues will be handled:

    —  defining sector boundaries;

    —  working with competing jurisdictions;

    —  conflict between duties to promote competition and protect consumer interests;

    —  avoiding duplication.

  In respect of the first bullet, the Bill assumes that the industry for which OFCOM is responsible has, in some form, distinct and confinable boundaries. However, the current and future world of digital television, broadband and telecoms is multi-faceted and the market players are not only network operators, but also software companies, global content businesses, rights holders such as sports organisations, etc. All of these entities will have central and determining roles in the UK's communications industry so OFCOM's Competition Act powers will need to apply to all rather than a subset, eg the UK network operators. In other words, there is a need to avoid OFCOM's Competition Act powers creating asymmetry in terms of the regulation of the wider industry.

  At the jurisdictional level, OFCOM's relationships with other competition authorities will need to be clear and OFCOM will need to be sure of its scope for using its powers so that an action doesn't conflict with another jurisdiction. For example, the European Commission has a duty in respect of the larger multi-national players in the industry and it is quite feasible that the bulk of UK players would be subject to EU jurisdiction. This implies that OFCOM creates a second strand of subsidiary authority to the EU, which co-exists with the OFT. The ability of the OFT to work in conjunction, and communicate, with the EU requires diligence and resource, so will OFCOM. The relationship between OFCOM's competition and regulatory powers needs to be clearly defined.

  In terms of potential conflicts between OFCOM's duties to promote competition and customer interests, it will be difficult for OFCOM to temper some Competition Act decisions when weighed against specific consumer interests. An historic example of this is BT line rental rebalancing was not fully implemented. Such conflicts could undermine OFCOM's role as a competition authority.

  Finally, there are only so many economists and case officers with the necessary Competition Act skills that can be used by competition authorities. Having two "competing" institutions, with replicated resources, could lead to inefficiencies.

B.4  OFCOM's structure and transparency

  This above challenges and range of activities suggests that OFCOM should have a strong, central (umbrella) strategic activity that acts as a buffer between Government objectives and the market's ability to deliver (with or without regulatory intervention). The next layer should provide a strong economic regulation (and technical) capability for each element of the supply chain.

  A key concern must be whether OFCOM will be able to assemble all the necessary skills and get them working together to deliver the above outcome. Whatever the structure, some settling down must be expected; this suggests that the structure should not be too ambitious or radical as its staff must be sure of their role.

  We believe that OFCOM should adopt the principles recommended by the Better Regulation Task Force and are clear on what any particular regulatory intervention is expected to achieve. It should then be required to carry out subsequent market reviews with the objective of assessing whether the regulatory measure has had the desired effect or a different effect.

  Most importantly, OFCOM must be accountable (ie it must understand the wider implications of its decisions and take responsibility for them). It should be mandated to carry out comprehensive regulatory impact assessments (ie to review the impact of its proposals on markets as a whole, not just on the company/companies that is/are the target for the regulation). The ``policy narrative'' (paragraph 5.2.3) provides for the addition of conditions to cover this point.

  There is, perhaps, an argument for an Economic Advisory Board to be formally created to review OFCOM's regulatory proposals with a view to assessing the potential for unintended effects. This could have an advisory role similar to that of the Content Board and Consumer Panel.

B.5  OFCOM's relationship with the BBC

  We note the arguments for the BBC to be granted "special privileges" in the light of its role but it has be recognised that it has a combination of market power and a privileged position (from its access to public funding), which it could abuse, either consciously or unconsciously. Therefore, it is difficult to see why it shouldn't face the same behavioural controls in the new era as commercial broadcasters. It is not clear, at this stage, how a decision supported by the governors and, possibly, ratified by the Secretary of State, would, if it is proved to be anti-competitive, be brought to account.

C.  THE PROPOSED FRAMEWORK FOR THE PROMOTION OF A DYNAMIC AND COMPETITIVE COMMUNICATIONS AND MEDIA MARKET IN THE UK

C.1  Learning from historic telecoms regulation?

  We have referred above to the fact that Government policy objectives often require significant private sector investment—and, historically, policies, particularly in telecoms, have been to encourage such investment, although primarily from new entrants rather than the incumbent—eg infrastructure competition from the mid 1980s.

  Since 1984, Oftel has had to wrestle with BT's market power, its efficiency, the need to interconnect new networks, the need to lower barriers for new entrants and the implementation of European legislation lagging behind UK, whilst trying to create the climate for infrastructure competition and service competition.

  This has involved interventions in retail pricing (RPI-x), wholesale pricing (using fully allocated and then long run incremental costs), tariff rebalancing, access deficit charges, service provider revenue sharing, local loop unbundling, etc.

  However, the market is still not deemed to be fully competitive, large debts have been incurred and the capital markets are not supporting the sector at a time when extended broadband coverage, digital switchover and new content/service development is high on Government's agenda. How much historic sector specific regulation has led to this situation can be questioned. What is important is that the regulatory regime going forward should learn from past experiences and aim to create an environment that will allow the market to work more effectively and allow innovation, new risk investments and competition in infrastructure, content and services.

C.2  Future regulatory challenges

  In the converging world, OFCOM will be faced with a number of complex issues particularly related to the interconnection of networks and services, using a range of different standards and the issue of "access".

  Multi-channel television, new forms of interactive content and new access devices are changing the economics of broadcasting and, with younger generations entering the purchase chain, these trends are likely to continue over the next decade—which is the period that new legislation has to address.

  In the digital age, more sources of commercial content will continue to emerge and demands on access infrastructure providers to carry more public service material will increase for both broadcast TV and other public services, such as Government information.

C.3  The "access" debate

  "Access" can mean a number of different things but has implications throughout the supply chain—in essence, access "bottlenecks" can include content ownership, software and consumer equipment standards, as much as the more commonly quoted "network gateway".

  Action, in isolation, to open up any single bottleneck, without considering the impact on the other parts of the supply chain could create distortions.

  In reality, all parts of the supply chain need an appropriate commercial scenario to attract the required investment. For example, an access network operator's goal should be to use the network for distributing content that consumers value and can afford, to maximise the number of connections to the network and make a reasonable overall return

  As an access infrastructure owner, Telewest believes that it is reasonable that it should be reimbursed for the use of the asset, including for "must carry" channels. Whilst there is acceptance that the existing "must carry" rules will be carried forward, we would not wish to see a situation where any publicly funded channel or service could be carried under "must carry" provisions for no recompense. This is not an efficient use of spectrum and has implications for commercial providers of channels. An associated issue relates to due prominence of public service content on EPGs. In this case, as we see the EPG becoming a personalised "home page", and therefore, subject increasingly to consumer design preferences, the role of regulation needs to be carefully reviewed.

  As a channel provider, Telewest believes that content owners/creators should also expect reasonable recompense. In this respect, we are aware of the potential for piracy and that there is a need to address such issues as digital rights management and micropayments—so that the new market can be enabled to meet consumer demands, which will be the drivers for broadband based access.

  There may be a public policy argument to set different criteria for valuing public service content and its carriage but this should be applied consistently across platforms. It is an area that needs further review as part of the implementation of the European Universal Service Directive, which is not fully incorporated in the draft Bill.

C.4  The need for new commercial models to evolve

  In summary, there is a need for new commercial models to emerge for the "narrowcasting" world that will encourage both networks and content owners/creators to more readily "open up" their network and content assets. OFCOM should work to allow this to happen by addressing the areas of interconnection and interoperability in a way that respects the needs of the respective suppliers but recognises where anti-competitive behaviour is inhibiting outcomes. This is where comprehensive regulatory impact assessments (and a separate economic advisory body) to review the impact of regulatory proposals on the supply chain could be very effective.

D.  THE PROPOSED STATUTORY FRAMEWORK FOR CONTENT REGULATION, INCLUDING THE DEFINITION OF LICENSABLE CONTENT, BROADCASTING AND PUBLIC SERVICE BROADCASTING

D.1  Licensable content

  Today, around 43 per cent of UK homes have multi-channel television and enjoy access to a wide range of niche channels and content sources that meet their individual interests and lifestyles. The continued deployment of digital and, more importantly, broadband technologies, will see the number of multi-channel viewers and information sources increase significantly in the next few years. This will increasingly lead to a "pull" model, where consumers will choose the content they require, rather than the "push" model of linear broadcasting. It is against the background of this change, that the definition of licensable content and the role of broadcasting, notably public service broadcasting, should be set.

  Currently, although the "policy narrative" (in the introduction to Chapter 3) states that "OFCOM will have no power to regulate content on the internet", this is not consistent with other provisions, such as the definition of licensable content, the role of the Content Board, the requirement for the industry to develop filters and the powers of the Secretary of State to modify provisions.

  At this time, the definition of "licensable content" and the ability of different entities to intervene create uncertainty. One possible modification is to incorporate wording to differentiate between content that is purely broadcast (using the "push" model) and that which is "pulled" by consumer choice.

May 2002


 
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