Memorandum submitted by Telewest Broadband
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
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
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 interoperabilitywhich will be essential
to the effective operation of the supply chain, from consumer
equipment through access networks and systems to content and service
It is against this background that we comment
below on the themes listed in the Committee's Press Notice 2 calling
B. THE PROPOSED
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 convergencenot
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;
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
C.1 Learning from historic telecoms regulation?
We have referred above to the fact that Government
policy objectives often require significant private sector investmentand,
historically, policies, particularly in telecoms, have been to
encourage such investment, although primarily from new entrants
rather than the incumbenteg 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 decadewhich
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
C.3 The "access" debate
"Access" can mean a number of different
things but has implications throughout the supply chainin
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 micropaymentsso 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
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
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.