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Viscount Astor: My Lords, my Amendment No. 164 is similar to that of the noble Baroness. Although it is not grouped with hers, it is on the same issue, except that my amendment makes Oftel the regulator while hers makes ITC the regulator. The noble Baroness said that she was letting the noble Lord, Lord Thomson, know that she was going to ride two horses. I am more modest. I find great difficulty riding one horse at a time. Therefore, I shall speak to my amendment when it comes, but it may help your Lordships if I say a few words on Amendment No.4.

First, I wish to thank the Minister for arranging a meeting for me with the Parliamentary Under-Secretary at the Department of Trade and Industry. It is the policy of the department that affects the issue. I am grateful to the Minister for meeting me. We had a useful discussion after which we understood each others' views much more clearly. Unfortunately, having said that, at the meeting I was unable to persuade the Minister of the validity either of my case or of that of the noble Baroness. His arguments were not dissimilar to those we discussed previously: first, that digital would arrive relatively quickly; secondly, an amendment could undermine investor confidence in the future by the fact that we are changing the rules; and, thirdly, analogue transponder capacity is limited and therefore it is a much more serious obstacle than the terms that would be offered from BSkyB. In any event, the Minister's final point was that it was all covered by competition law.

There are good answers to those points. First, as regards digital arriving quickly, even BSkyB cannot say when it will begin transmitting by digital satellite. If anyone knows, it should. As we have heard, no one can say when there will be a switch off for analogue satellite broadcasting so we do not know when it will happen. The second point was that any amendment could undermine investor confidence. The simple answer to that is that any future investor in digital will have to abide by the same rules. All we are doing is taking the Government's own rules and extending them to analogue. Thirdly, there is the point that analogue capacity is limited. Of course it is. There are about 80 channels, some more successful than others. They change hands between broadcasters; the spectrum is bought, sold, transferred and rented out. That does not mean that anyone could be excluded. Fourthly, we all know that competition law covers the area. As the noble Baroness said, the OFT is looking into the issue, but we know that the review will take at least six months. OFT reviews always seem to take at least six months. The point of putting it in the Bill is that it does not have to take six months; it is there as a licence condition.

It is worth making another two points. I just about understand my amendment; I do not understand that of the noble Baroness because it is even longer. I am sure that mine does not stray into the area of regulation in cable transmission capacity. I believe that the focus should be on conditional access systems only. Any regulation of cable would remove incentives from cable

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operators to invest in network provisions. I believe that I am right in saying that neither the noble Baroness's amendment nor mine applies to the underlying networks.

My other point is that my amendment and that of the noble Baroness have strong support throughout the industry; the ITV companies support them. The thrust of the amendments is important because we believe in competition. I hope that we believe in fair competition. Without the amendments there is the possibility that BSkyB will have an unfair advantage over anyone who wishes to join the market. Without this amendment companies face the possibility of having to wait until the introduction of digital. We know that that is somewhere down the line. By the time digital is introduced, BSkyB will have had the ability to saturate the market. It will be too late. The very reason that BSkyB has been so successful--and we must commend it on its success--is that the 1990 Act prevented ITV companies from joining in the game. They are not allowed to by statute. We are not trying in any way to inhibit the growth of BSkyB, or affect it. What we say is that there must be fair competition. I very much support in principle the noble Baroness's amendments. I hope that mine are marginally better, since they offer Oftel as the regulator, which seems to be the way things are going, and follow the Government's line.

As the noble Lord, Lord Thomson, said, what matters is not who the regulator is, but the fact that there is regulation.

5 p.m.

Viscount Chelmsford: My Lords, I make two points. First, the best technical advice that I have been able to receive concerning digital and set-top boxes is that it would be dangerous at this moment to plump for any one of the particular systems mentioned and that, if we hang on, something better may emerge which allows everything that the noble Lord, Lord Thomson, seeks and which I wholeheartedly endorse. I caution against fixing on something at this particular stage for digital.

Secondly, I am grateful to the noble Baroness, Lady Dean, for her comment that her amendments are not intended to include cable companies. However, I draw her attention to Amendment No. 43, which links subscriber management systems to local delivery services. Local delivery services include cable companies. They provide a gateway for access provision. As I hope everyone realises, those gateways are wide open. The more the companies can bring through the cables, the happier they are.

Lord Colwyn: My Lords, I spoke briefly in Committee on this group of amendments covering analogue conditional access and subscriber management systems. I have to admit that, as the debate continued, I realised that I did not fully understand the position. However, I have now done some homework and, regretfully, I still cannot support the amendments. I hope to be able to cover some further points on this matter, including the analogue/digital position, in further

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discussion on my noble friend's Amendment No. 164. At this stage, I ask the House to reject these amendments.

Lord Inglewood: My Lords, once again we have had a very useful debate on this subject. In addressing my remarks to it, I shall speak to the grouped amendments to which the noble Baroness, Lady Dean, referred. I shall also touch on the substance of the amendment tabled by my noble friend Lord Astor. I suppose that it will enable your Lordships to have a preview of some of my later arguments. But at the same time I hope it may assist the House in the general consideration of what is by any standards an important subject.

We saw in Committee the general substance of these two amendments. They seek two broad results: first, to institute a licensing regime for both analogue and digital conditional access services; and, secondly, to establish the ITC as the regulator in this area. In Committee, as the House may remember, I gave a full account of our reasons for selecting Oftel as the appropriate regulator, and many noble Lords indicated that this was, to quote the noble Lord, Lord Thomson, "obviously not an issue we would wish to die in a ditch over". The greatest attention focused on the question of analogue conditional access, on which I intend to concentrate.

First, let me just rehearse, briefly, the question of which regulator. As I noted in Committee, conditional access systems already require licensing under the Telecommunications Act framework--they are concerned fundamentally with the transmission and processing of telecommunications signals. The ITC's powers would need to be extended to deal with them, and this could result in regulatory double jeopardy. Close co-operation would in any event be required by our proposals between the DTI, Oftel and the ITC in administering the licensing regime. Broadly speaking, Oftel licenses communications-related systems, while the ITC is concerned primarily with broadcast services. This is, in our view, a sensible division of labour which is already working well.

The noble Baroness, Lady Dean, referred to the question of the content that flows through the conditional access gateway. She made the point that because it is the content that is so important--and Oftel is a regulator principally concerned with the mechanics of gate-keeping rather than the substance of what passes through the gate--it is therefore appropriate that the regulator should not be Oftel but should be the ITC, since it is the best body to deal with the matter of regulating content. That overlooks the important fact that the content passing through this particular gate is not just content "plucked out of thin air"; it is either content that will be regulated by the ITC under general broadcasting legislation, or content coming to this country under the rules of the single market, with the relevant safeguards and regulatory systems inherent in that. What we are seeing here is not a gateway which is a form of tariff through which an enormous cascade of unregulated content will pour, but rather a gateway through which content regulated and controlled content

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at a previous stage in its existence will pass. I therefore feel that that particular approach by the noble Baroness is inappropriate for the reasons I have just given.

So far as digital conditional access systems are concerned, the Government's proposals seek to provide the necessary support for effective competition in the market-place. This includes requirements to offer services on fair, reasonable and non-discriminatory terms, to prohibit linked sales, to implement accounting separation, and to allow the director to demand published tariffs where necessary. They also provide, in our view, for more effective and comprehensive remedies for anyone affected by abuse of a dominant position or anti-competitive behaviour.

I believe that our debate has again underlined that we all wish to see the development of an efficient and competitive market in television programme services. The difference between us appears to be only a question of judgment as to the benefit of new regulation in analogue satellite broadcasting.

The question has been raised on several occasions: if regulation is needed for digital, surely it must also be needed for analogue--what is the difference? The fundamental difference is that when digital services are fully developed the digital conditional access services will be the gateway to every home and customer in the country, over every delivery mechanism--that is, for terrestrial as well as cable and satellite broadcasts.

Analogue satellite, by contrast, serves just 15 per cent. of homes in the country. It is unlikely that this will grow significantly in the future. Even with the latest advances in conditional access technology for analogue systems, the scope for any of the existing broadcasters using satellite to support a significantly larger pay-TV base seems distinctly limited, particularly on pay-per-view. Our judgment is therefore that the market is unlikely to grow to any significant degree.

The reason is that any of them would probably need to cannibalise some of their existing channel capacity for conditional access signals, which would reduce the attractiveness of their offerings. That is because the signals needed to authorise a set-top box to descramble a particular programme have to be packed onto the available analogue frequencies along with the programme itself. The bandwidth available for this is extremely limited in analogue, but more is required if there are to be more subscribers. Any substantial development of pay-per-view services is even more demanding of bandwidth. Taken together with the absence of a return path from the customer to the service provider, this makes significant expansion of pay services on analogue satellite before the move to digital highly unlikely.

In considering the move to digital, there is a clear advantage to being the first mover in the new markets. With the prospect of competition between terrestrial, cable and satellite there is a clear strategic incentive to begin the move sooner rather than later. Once begun, it would be beneficial to move subscribers across quickly to focus resources on the new markets with growth potential and to build the subscriber base as quickly as possible.

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Analogue satellite is therefore a small segment of the total analogue market which is unlikely to grow significantly but which is likely to give way relatively quickly to digital services. That is not the sole basis for the Government's view of the need for licensing, as some have attempted to suggest. But it is the background against which we have to judge the balance of interest in imposing a major change in the regulatory framework for an established market.

One key issue we must consider in reaching this judgment is the investment environment for companies in long-term projects such as new broadcasting services. It is important for companies, and their investors, to understand clearly the framework of regulation which will apply at the outset of their investment. Stability in this framework is very important in maintaining investment confidence, particularly in financing bond and equity markets. That is why we have set out our proposals for digital conditional access now--before the markets have developed. We have to consider the impact of a major change in regulation for an established but limited market on investment confidence--not just in analogue, or even in digital, but in the wider market opportunities in the UK. We have to take account of the potential impact that such a move could signal in the widest context.

We know well the importance of regulatory stability in this regard from our experience in setting the framework for competition in the provision of cable entertainment and telephone services. Here, a guarantee of regulatory stability produced a step change in the investment in alternative telecommunications infrastructure in this country to the tune of over £10 billion in this decade.

That does not mean that we are prepared to tolerate abuse of a dominant position or anti-competitive behaviour to the detriment of competition and consumers. Ex post facto, additional regulation may be justifiable where such behaviour has been demonstrated. The Government are committed to making a robust response to any proven instances of anti-competitive behaviour. There is already a proper framework and process for all established markets through the general provisions of competition law. Noble Lords will know that that is currently being used to examine questions in the very area that we are debating, as has already been mentioned. The Director-General of Fair Trading is conducting a thoroughgoing review into various aspects of BSkyB's wholesale supply of programming. Should he have a concern about competition, options open to the director include seeking binding, enforceable undertakings from the offending parties or referring all or parts of the matter to the Monopolies and Mergers Commission for a ruling. Both give the scope to introduce any further measures that are demonstrably required.

A second key issue that we must build into our considerations is what benefit there might be in introducing new regulation. We must ask who could gain from this new regulation. It has been suggested that, for example, existing ITV companies, which prior to the changes proposed in this Bill were prevented from offering satellite transmissions, might now wish to offer

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subscription or pay-per-view services on analogue satellite, before the move to digital. If so, it is argued, they would not wish to develop their own analogue encryption system, but would naturally seek to use the News Datacom Videocrypt system to provide the conditional access services that they would need. They might, however, get a more favourable commercial deal for the provision of conditional access services if detailed regulation were imposed specifically to drive down prices.

However, the most fundamental issue for any broadcasters wanting to take this step for the first time is likely to be not conditional access, but the availability of analogue satellite transponder capacity. Analogue satellite capacity is basically saturated at present. Astra--the principal satellite provider--is now providing new capacity as digital only. Although there may be some scope to buy out, or take over, existing channels from a variety of other broadcasters currently using analogue, there is in practical terms very little room, if any, to accommodate them alongside the wide range of broadcasters already transmitting through the satellite.

Contracts for conditional access services in analogue markets are in any case already covered by the general provisions of competition and contract law to regulate any anti-competitive behaviour. Furthermore, there is nothing, as I understand it, to prevent such broadcasters from seeking encryption services from BSkyB while providing subscription management themselves or seeking it from other providers--of which several already exist. That would certainly provide a basis for negotiation of acceptable terms. The question is whether it is appropriate to intervene directly in a transaction between two companies in an established market with further specific and detailed regulation. The outcome of the OFT inquiry into the current practice on issues of this kind will be known by the time any such moves for new analogue channels come about. It is, in our view, only justifiable to introduce such additional regulation ex post facto, if there is a clear case of anti-competitive behaviour. To date, that case has not been made, but should the Director-General of Fair Trading have competition concerns, then it will be possible to implement any necessary action at that time, as I have already noted.

Before concluding, I should like to make some comments on the points made by the noble Lord, Lord Thomson, about what I might describe as the establishment of a mandatory single interface. In this context, I echo the remarks of my noble friend Lord Chelmsford. From this perspective, one cannot be sure what might be the best form of interface, if one were to go down that particular road. It is relevant that the digital television group is working currently in co-operation among its various component members on this very problem.

As I understand it, the European directive sets certain standards without establishing a single form of mechanism. In doing so, it also specifies that one cannot so arrange matters as to exclude one's competitors. Indeed, that is underscored by competition policy. Equally, later I shall move an amendment on behalf of

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the Government in respect of the multiplex licensing criteria, which is concerned particularly with ensuring that the way in which the ITC--we are talking here principally about television--looks at possible multiplex proposals has to be judged against an overarching criterion of measuring it against its ability to drive forward the successful take-up of digital television. In itself that is a very considerable impetus towards bringing subscription management and encryption systems together in such a way that any individual player in the game has to try to devise his proposals in a manner that will encourage the take-up of digital as a whole; and anyone doing the kind of things to which the noble Lord, Lord Thomson, alluded--namely, to try in some way or other uncompetitively to exclude some other player in the game--would undoubtedly be undercutting efforts to develop the digital terrestrial television in this country as a whole.

In summary, the Government remain of the view that the suggested amendments are not needed. The Government have published proposals for regulating digital conditional access systems. Analogue satellite is an established market segment, which has strictly limited growth potential, but which is likely to give way relatively quickly to digital markets. Concerns about behaviour in this market are being addressed through the current OFT investigations. This process will be able to provide for any further action which is necessary if those concerns are substantiated. The case for benefits which might flow from the amendment is very unclear. On the other hand, the potential for damage to investment confidence in UK markets is very clear, on the basis of our experience in the last several years. This is the balance of our judgment and why we shall oppose the amendments if the noble Baroness wishes to press them to a vote.

5.15 p.m.

Baroness Dean of Thornton-le-Fylde: My Lords, first, I must thank all noble Lords who supported this group of amendments in the discussion. Perhaps I may sum up on three key points that have emerged from the debate. In front of me I have the consultative document from the DTI. The Minister put up a valiant argument as to why the DTI is the appropriate department. But the Secretary of State for National Heritage said that:

    "we have always recognised the importance of conditional access to digital television ... I welcome the DTI's proposals and in particular their commitment to full co-operation with the ITC".
To me, such Whitehall language is saying, "We put up a valiant fight but we didn't win. We just hope that the DNH and the regulatory bodies accountable to us will have some part to play in the future of regulation in this field."

The noble Viscounts, Lord Astor and Lord Chelmsford, quite rightly raised the issue of cable. I should like to give an assurance to the House that there is no intention in the amendments that I put forward in any way to harm the cable industry. That is not the intention of the amendments.

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The third point was the issue of fair competition. The OFT can always look at that as they are looking at BSkyB at the moment, as can the Monopolies and Mergers Commission. But those bodies take a long time. In my experience when a service provider has an idea for a service to put on, it is nipped in the bud if it comes up against a power bloc which does not allow it reasonable access to promote those services.

I hold a press release from New Media Markets dated November 1994 which says that a company called Travel wanted to provide a service through BSkyB. Discussions took place--no one has ever said that there have not been discussions. The company did not go on line with BSkyB because it was told that the satellite company wanted a 50 per cent. stake in the channel which was to provide the travel service. The result was that it did not go on air. Those are the kinds of worries I have in relation to free competition. That is not the market at play; that is dominance at play. That is one of our concerns and one of the reasons the amendments were tabled.

I am grateful to the noble Viscount, Lord Astor, for lifting the curtain on the discussion that took place between himself and the junior Minister for the DTI. At the end of the day it would appear that the amendment of the noble Viscount will be opposed up to the hilt, as this one has been. I am becoming extremely concerned about the whole area. There is general consensus across the House that conditional access is crucial in the Bill. It is crucial for the consumer, for the industry and to ensure that we have competition, fair access and that the new services are successful.

We seem to be up against a brick wall, though in the course of the debates we have seen the Government make a considerable number of acknowledgements and changes. They have been extremely co-operative. The Minister has been complimented, and rightly so, for the open-minded way in which the Bill has been approached; that is, until we came to this crucial issue. We need to test the opinion of the House. This is an important part of the Bill and I ask the House to decide the issue.

5.22 p.m.

On Question, Whether the said amendment (No. 4) shall be agreed to?

Their Lordships divided: Contents, 110; Not-Contents, 136.

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