Select Committee on European Union Minutes of Evidence


Annex 1

COMPETITION IN E-COMMERCE MARKETS

1.  INTRODUCTION

  1.1  In its 1998 Competitiveness White Paper the UK Government set, as one of its aims, to "make the UK the best environment in the world for e-commerce". To further this aim, the Cabinet Office recently published a report, entitled [email protected] (the "PIU report"), which sets out some 60 recommendations aimed at developing the take-up of e-commerce in the UK. One of the recommendations is that OFT/Oftel should conduct a review to identify potential barriers to competition in electronic commerce markets.

  1.2  The purpose of the present paper is to provide a general overview of the dynamics of the developments of demand and supply in e-commerce markets, together with initial BT views on the issue of barriers to competition in electronic commerce markets. These initial views will be supplemented, in due course, by a more detailed BT submission in response to the forthcoming OFT/Oftel Consultative Document on this issue.

  1.3  In essence, demand for e-commerce services is rapidly expanding in the UK, particularly in the business-to-business sector, which represents 80 per cent of e-commerce revenues. There are, however, a number of factors that may slow down the take-up by businesses and consumers of e-commerce in the UK. These include:

    —  lack of skills and knowledge about e-commerce;

    —  lack of understanding about the opportunities and (for businesses) the threats presented by e-commerce;

    —  concerns about privacy;

    —  concerns of business about an effective legal framework to deal with issues such as electronic money, intellectual property rights, security, digital signatures, consumer protection and taxation.

  1.4  As part of its review, OFT/Oftel should perhaps consider a detailed review of the factors that may slow down the take-up of e-commerce and their relative significance.

  1.5  In considering how the OFT/Oftel can address the identified factors that may slow-down the take-up of e-commerce, it may be useful to take account of the lessons of the FCC in the US. A July 1999 working paper issued by, but not necessarily on behalf of, the FCC entitled "The FCC and the unregulation of the Internet" provides the following insights:

"Fundamental lessons learned from the Commission's 30 year deregulatory approach towards data networks include:

    —  Do not automatically impose legacy regulations on new technologies;

    —  When Internet-based services replace traditional legacy services, begin to deregulate the old instead of regulate the new; and

    —  Maintain a watchful eye to ensure that anti-competitive behaviour does not develop, do not regulate based on the perception of potential future bottlenecks, and be careful that any regulatory responses are the minimum necessary and outweigh the costs of regulation".

2.  THE DYNAMICS OF DEMAND FOR E-COMMERCE SERVICES IN THE UK

  2.1  The PIU Report defines "electronic commerce" as "the exchange of information across electronic networks, at any stage in the value chain, whether within an organisation, between businesses, between businesses and consumers, or between the public and private sectors, whether paid or unpaid".

  2.2  Electronic commerce activities are generally subdivided into the following four categories of e-commerce activities: business-to-business ("B2B"), business-to-consumer ("B2C"), consumer-to-business ("C2B") and consumer-to-consumer ("C2C"). The two main categories are B2B and B2C, which together generate virtually all e-commerce revenues.

B2B

  2.3  B2B involves transactions and the exchange of information between businesses. The PIU Report notes that at least 80 per cent of e-commerce revenues are generated in the B2B segment; also, in the UK e-commerce revenues were expected to reach $4.5 billion in 1999, rising to $47 billion by 2002.

  2.4  The key benefits to UK companies of adopting B2B strategies can be summarised as follows:


  2.5  In a September 1999 report on e-commerce, entitled "B2B: 2B or not 2B?", Goldman Sachs analysed in considerable detail the factors affecting the development of B2B. A copy of this report has been provided to the OFT and Oftel. The report states that the cost savings benefits alone make the adoption of B2B a "no-brainer" for companies. The report calculates that, by using B2B strategies, companies can make cost savings, depending on the industry concerned, of between 2 per cent (in the coal industry) to up to 39 per cent (in the electronic components industry). The report concludes that:

    "Significant cost savings offer a demonstrable ROI [return on investment] that compels management to embrace B2B as a means to gain competitive advantage". (Page 6 of the report).

  2.6  The Goldman Sachs report notes that a key determinant in the take-up of B2B strategies relates to the progression through the adoption lifecycle of this technology, as with any new technology. In other words, the adoption of any new technology, including B2B, goes through a lifecycle, which can be represented as follows:


  2.7  In the view of Goldman Sachs, B2B has begun to penetrate the early majority. In the UK, it might be said that the adoption of B2B is moving from "the chasm" to adoption by the early majority.

  2.8  In January 2000, Ernst & Young published the results of an annual survey on take-up of e-commerce in the UK. The survey showed that there has been an "extraordinary" increase in take-up of e-commerce in the UK but that certain barriers to take-up remain:

    "The most common factors regarded as barriers to developing and implementing an e-commerce strategy are people-related: lack of skill and knowledge within the business (42 per cent); limited people resources (42 per cent); lack of senior management's time (33 per cent) and lack of understanding of the opportunities and threats presented by e-commerce (28 per cent)". (Ernst & Young press release, 7 January 1989).

  2.9  Also, a December 1999 Forrester Report entitled "Europe: The Sleeping Giant Awakens", highlights the social, organisational and commercial difficulties faced by companies in deciding whether to adopt B2B strategies:


  2.10  The above-identified barriers are typical of the early stages in the adoption lifecycle of a major new technology.

  2.11  Furthermore, the European Union has so far lacked an efficient and effective framework of regulation for e-commerce. Issues such as privacy, electronic money, intellectual property rights, security, digital signatures, consumer protection and taxation are gradually being addressed at an EU level. Once these issues are dealt with, European businesses, including UK businesses, which may often be more "risk-averse" than their US counterparts, will be more likely to focus their efforts on developing B2B strategies.

  2.12  The issue of the security of information exchanges and transactions over the Internet is particularly important. The DTI's web site (www.dti.gov.uk) refers to the inherent insecurity of the Internet and, as stated in an article in The Sunday Times on 6 February 2000:

    "Online fraud is widespread. Many companies have delayed their e-business plans because of security worries. The repercussions could be very damaging to Britain's economic growth".

  2.13  Nevertheless, in a report published in January 2000 by Mori, which is referred to n an article in The Financial Times on 24th January 2000, states that "Europe, and particularly the UK, is not far behind the US in the basic uses of the Internet—communication with customers and suppliers, promoting products and services and recruitment"; also, "US companies are only slightly ahead in the use of the Internet for buying products and services, selling products and services and financial transactions compared with the UK".

  2.14  In summary, whilst UK companies may currently be slightly behind their US counterparts in terms of using B2B strategies, the reasons for this appear to be essentially social, cultural and organisation and, in any event, UK companies are catching up fast.

B2C

  2.15  The drivers of demand and supply in the B2C sector are very different to those in the B2B sector. The following table, from the Goldman Sachs report referred to above, highlights a number of key differences:

  B2C B2B
Switching CostsLow with multiple suppliers High when integrated with e-frastructure; few qualified suppliers
Relationship TypeTransactional Long-term, mission critical
Transaction TypeSmaller average selling price Larger average selling price
Revenue ModelTraffic volume is critical; Large customer base in key Don't need every customer, only need the right customers


  2.16  In a 1998 Spectrum Strategy Consultants report, commissioned by the DTI, entitled "Moving into the Information Age: An International Benchmarking Study", the cost of a PC was noted as a major barrier to take-up in the UK:

    "For the home user, the cost of a PC still represents a substantial expenditure and a major barrier to uptake. It is likely, therefore, that ownership of PCs will remain the domain of middle and high earning households for some time to come."

  2.17  This report also notes, however, that:

    "Lower earning households may, however, be able to become more involved in the Information Age as a result of the development of new technologies such as Web TV and digital TV. These will allow people to access interactive services including the Internet via a television set without the need for investment in a PC". (Section 7.2 of the report).

  2.18  The following table is a useful indicator of the extent of on-line activity in the UK and how this compares with other EU countries. It shows that the UK is well ahead of the rest of Europe in terms of consumer online shopping revenues:


  2.19  On the question of the impact of telephony charges on the take-up of Internet access in the UK, it is important to bear in mind that this will to some extent depend on the perceived value to the customer of the Internet access. Once customers appreciate that for the price of, say, a take-away pizza, under BT's forthcoming Surftime offer they could spend every weekday evening or all of the weekends online for a month to pursue their entertainment, educational and purchasing interests, the telephony charges are unlikely to inhibit their Internet take-up.

  2.20  Also, in comparing Internet access prices in different countries, the extent to which the varying levels of application of similar regulatory requirements in these different countries gives rise to significant differences in prices should be noted. In particular, the regulatory environment within the UK is enforced much more strictly than in the rest of the EU. Regulatory factors that affect relative price levels include:

    —  Cost orientation obligations. Cost-orientation of retail tariffs by an incumbent operator is a common requirement. However, as a result of cost accounting systems not being implemented properly in European countries other than the UK, the degree of cost orientation is often unclear.

    —  Tariff rebalancing (ie, the rebalancing of line rental and call charges). Tariff rebalancing has occurred at different rates across Europe. BT, France Telecom and, to a lesser extent, Deutsche Telekom have undergone tariff rebalancing. In particular, BT has undergone extensive rebalancing since the onset of competition. Tariff rebalancing in the US and Canada is not an objective of the operators or regulators and, therefore, has allowed for varying approaches to local pricing, including flat rate pricing.

    —  Cross subsidisation. Restrictions on cross subsidisation cannot be fully enforced in many EU countries, as detailed cost accounting systems are not yet in place. Where this is the case, cross subsidisation may occur, enabling lower cost offerings at the local level. The extensive cost accounting systems in place within BT, as required by regulation, means that a lower local cost offering through cross subsidisation is not possible.

3.  THE DYNAMICS OF SUPPLY OF E-COMMERCE SERVICES IN THE UK

  3.1  The convergence of telecoms, IT and TV technologies has resulted in fundamental changes to the dynamics of supply and the nature of the services supplied. As stated recently by the DTI/DCMS:

    "Convergence is a present reality in the way services are provided to the public: broadcasting, telecommunications and computer technology are seamlessly combined in, for example, television studios; and entertainment, information and private communications services are increasingly carried on the same networks. New services are coming to the market"[3].

  3.2  A very notable effect of this technological convergence is that companies which previously regarded themselves as providers of one type of service and as being subject to competitive threats from one clearly identifiable group of competitors, now find that they are facing competitive threats from existing companies which had previously operated in quite distinct markets, as well as entirely new companies offering new services.

  3.3  The following diagram, for example, highlights the competitive threats faced by traditional telecoms companies, such as BT:


  3.4  A consequence of these new competitive threats has been major new link-ups between companies with differing skills and experience, in order to provide the new services. Recent examples of such link-ups include:

    —  Microsoft's investments in the UK cable companies, NTL and Telewest. Microsoft has a 5 per cent shareholding in NTL and a 29.9 per cent shareholding in Telewest.

    —  A report in The Times of 29 January 2000 states that BSkyB and Kingston Communications are on the verge of forming a joint venture that would enable Kingston Communications to provide a 60-channel television service via telephone lines, using ADSL technology.

    —  On 10 January 2000, AOL and Time Warner announced their proposed merger; the value of the merged entity will be in the region of $350 billion.

    —  On 30 January 2000, Vodaphone and Vivendi announced plans to establish a joint venture to create a multi-access European portal. The deal involves exclusive rights to Vivendi content.

  3.5  The emergence of these new converged markets will, no doubt, give rise to very important issues relating to the regulation of the radically different market players.

4.  GATEWAYS TO PROVIDING E-COMMERCE SERVICES

  4.1  The following pages provide a general overview of a number of the main "gateways" to the Internet and a discussion of potential competition issues.

Terminal Equipment

  4.2  Currently, most Internet users obtain access to the Internet via their PC, whether at home or work. An October 1999 report by Inteco, entitled "Forecasts for Internet Access—UK: The Rise of Non-PC Platforms" predicts that by 2003 the percentage of UK households with an Internet compatible PC will rise to 45 per cent.

  4.3  Increasingly, however, Internet users in the UK have a choice of a wide range of terminal equipment through which they can obtain access to the Internet and much of this terminal equipment is not reliant on a fixed telecoms network to provide this access. Examples of such terminal equipment include:

TVs

  Cable TV operators utilise set-top boxes in their networks, but increasingly the deployment of cable modems is taking place to enable interactive, high speed data and Internet services to be delivered to customers. Initially, the cable modems are in the form of separate, additional, set-top boxes. Increasingly, however, and particularly with the roll-out of digitial pay-TV services, the cable modem is being integrated into the TV to create a single unit for the customer to accommodate.

  The cable companies are increasingly significant providers of Internet access, via their cable telephony lines and, currently in the case of NTL, cable TV. The three major cable companies in the UK are NTL, Telewest and CWC; NTL's bid to acquire the consumer cable telephony, Internet and television operations of CWC is currently under review by the Competition Commission. The cable companies currently have a total of over four million residential telephony customers and three million cable TV customers (many of which are dual telephony/TV customers). Following recent cable consolidation and, particularly since NTL's nationwide advertising of its telephony and Internet access services since August 1999, the cable companies are well placed to meet future demand for Internet access services.

  Furthermore, the cable companies will have significant advantages in the broadband future. As well as targeting customers with PCs, they will be able to target those who do not own a PC but who could instead get access to the Internet via their TV sets. They can also provide high speed Internet access using DSL (Digital Subscriber Line) technology and cable modems which can provide speeds of up to 30Mbit/s downstream and 500Kbit/s upstream[4].

  Inteco estimates that TV-based Internet access is likely to reach over 40 per cent of UK households by 2003.

Mobile

  Internet access and e-commerce via cellphones is already taking off in the UK on the basis of the curent, second generation, digital technologies. Current mobile network technologies, such as high-speed circuit switched data ("HSCSD"), offer data rates of 28.8-64Kbit/s, matching the speed of most fixed line modems. UK mobile operator Orange believes that its use of this new technology will give the company "a unique opportunity to capture the wire free data and Internet market well ahead of its competitors".

  The UK is shortly to licence five operators for third generation (or UMTS) mobile networks in the UK. The introduction of UMTS in 2002 will see data rates climb to up to 2Mbit/s. UMTS support not only existing date applications, including faster internet access, but will also allow the development of new services such as video conferencing, multi-user games and interactive video.

  Strategy Analytics predicts that the UK will have 5.7 million mobile data users by 2005, whilst Ovum predicts a figure closer to 10 million.

Other Mobile Terminal Equipment

  In addition to mobile technology developments, there are also advances taking place in the world of cordless technologies. One such development is Bluetooth. This short distance wireless communication technology enables devices to be connected together without the need for cables. Using this technology, devices such as personal organisers/electronic diaries and laptop computers can be linked to other communications devices which are used to interface with cellular and fixed networks. Thus, almost any terminal will be able to comunicate across a mobile cellular network if connected to a mobile cellular radio interface via Bluetooth.

  These and other new developments are described in detail in the attached June 1999 report from Ovum, entitled "Wireless Internet: new frontiers for terminals".

Games Consoles

  These devices have, until recently, been stand-alone units, but Sega's "Dreamcast" product, launched during 1999, has changed this. In addition to the games facilities which one might expect with this type of product, there is also an in-built voice band modem that ensures customers can connect to the Internet via a TV. Having accessed the Internet through the terminal, a customer is then free to surf the Internet, rather than being contained within a "walled garden" of services.

  4.4  The chart below sets out the recent predictions, in a study by Inteco Corporation, of the number of home Intenet access users by platform in the UK:


  4.5  On the basis of the above, it is clear that in the future there will be a wide range of choice of terminal equipment through which users in the UK will be able to obtain access to the Internet.

Access Technologies

  4.6  The main fixed-line options available to customers are cable, copper (such as the BT telephone line) and enhanced copper (xDSL). BT is currently in the process of rolling-out an enhancement to its copper local loop, to provide Asymmetric Digital Subscriber Line (ADSL) technology. Furthermore, BT will be required to unbundle its local loop and, therefore, make it available for the provision of ADSL by third parties. As previously mentioned, BSkyB and Kingston Communications are, apparently, about to form a joint venture to provide television and high speed Internet access services via ADSL. These services could also be provided by other third parties, using BT's unbundled local loop or via BT's ADSL service provider offerings. The issue of reciprocal access over cable networks is being addressed in the course of the current investigation by the Competition Commission of the NTL/CWC merger.

  4.7  Customers may also obtain Internet access via mobile operators, as described above, and a significant further option will shortly be Local Multi-point Distribution Service ("LMDS").

  4.8  In July 1999, the Radiocommunications Agency launched a consultation process which will lead to a spectrum auction for the award of LMDS wireless local loop licences, which would be suitable for the provision of broadband services. Licences are expected to be awarded sometime in 2000. According to an article in the Electronic Times of 24 January 2000, the e-commerce Minister, Patricia Hewitt, has stated that the number of LMDS licences and their geographic scope will be decided in March 2000, after consultation with industry.

  4.9  LMDS is a broadband wireless access technology capable of delivering 155Mbit/s to, and 55Mbit/s from, a customer within a 2km radius of an LMDS transmitter. Essentially, LMDS could be used to construct wireless-based Metropolitan Area Networks with similar capacity to first generation metropolitan fibre networks, of the type built by recent new entrants, but requiring only a fraction of the capital expenditure required to install new fibre and duct. LMDS is ideally suited for broadband Internet access.

Interfaces

  4.10  It can be expected that, in the future, competition issues will arise in relation to the various technical interfaces, such as: Application Programming Interfaces, conditional access systems, operating systems and applications software.

  4.11  Amongst the issues that may need to be addressed by a competition authority in the future are those that arise from the battle relating to operating systems for mobile phones and other mobile terminal equipment. This battle is essentially being waged between the Symbian joint venture and Microsoft. The current Symbian members are Ericsson, Nokia, Psion and Motorola. The Symbian joint venture is developing the EPOC operating system for mobile phones and other terminal equipment. It is directly competing with Microsoft's Windows CE, an operating systems which is also specifically designed for mobile phones and other terminal equipment. In its attached June 1999 report entitled "Wireless Internet: New Frontiers for Terminals", Ovum states that:

    "There is a fear that if Microsoft imposes a PC model on the cellular terminals market, the only players to reap value will be software vendors and content providers. Microsoft dominates the PC market through licensing, branding and distribution—the Windows name dominates the desktop and could, conveivably, come to dominate cellular terminals. The "nightmare scenario" for the cellular market would be for terminal vendors to become the equivalent of the box-shifters in the PC market. This outcome is highly unlikely, however".

  4.12  The outcome of the Symbian/Microsoft battle will have very important consequences for the future development of e-commerce via mobile terminals.

Portals

  4.13  Portals, which are designed as entry points to the Internet, attract a large (indeed the single largest) share of Internet traffic. The following table shows the numbers of visitors to the top 10 UK web sites, eight of which are portals:


  4.14  The term "portal" can include ISP web sites, search engines and web directories, as well as web sites set up specifically as portals. In general, the differences between these types of sites has become blurred, as all have sought to enahnce their positions as gateways to the Internet and thus increase their reach in terms of Internet users. Furthermore, portals have sought to expand the range of services that they provide to Intenet users, in an effort to keep users on their sites for longer and generate more page impressions. This is particularly important in terms of increasing advertising revenues, which are based on the number of page impressions (even though payments based on click-throughs have become more important over time). Meanwhile, portals have also sought to consolidate their position as gateways to e-commerce, to the extent that transactions on behalf of other firms may be conducted through the web sites of the Internet portals.

  4.15  For example, AOL, which is the leading Internet property, has a wide range of proprietary web sites and offers a full range of Internet services, including news, entertainment, on-line gaming, e-mail, Internet shopping etc. AOL's merger with Time Warner is designed to enhance the range of content that it can provide to users through its network. Similarly, the Go Network, which began as a search engine, has expanded rapidly in terms of unique visitors in 1999 through its link up with key content providers, such as Disney and ESPN. There have also been a number of mergers between portals. For example, Yahoo—which is best known as the leading search engine on the Internet—has acquired Geocities, a popular Internet community portal.

  4.16  The largest US Internet properties are also strong in Europe. AOL, Yahoo and Microsoft have established a very strong presence in Europe. Their sites are amongst the top five in terms of Internet traffic in the United Kingdom, Germany and France; and both Microsoft and Yahoo have sites in the top 10 in Sweden. Two other US portals, the Lycos Network and AltaVista, also have strong positions in some European markets. However, in Europe US portals face strong competition from the portal sites of local ISPs, such as Freeserve, UKplus and Demon Internet (United Kingdom), T-online (Deutsche Telekom) and Wanadoo (France Telecom).

  4.17  Competition issues that may well arise in the future relating to portals include tie-ins and exclusive deals between content providers and owners of portals. An indication of the trend of such tie-ins and exclusive deals is the announcement on 30 January 2000 of the Vivendi/Vodafone AirTouch joint venture to create a multi-access European portal. According to a statement by the vodafone AirTouch Chief Executive, Chris Gent, this alliance will enable Vodafone AirTouch to benefit from exclusive access to content from Vivendi.

IP Backbone Networks

  4.18  The majority of customers access "The Internet" via a dial-up modem connection. Most of these dial-up connections now use non-geographic numbers which are routed to a limited number of locations where the ISP maintains the necessary modem banks. In this way, the UK PSTN networks are used to collect and consolidate IP dial-up traffic, and hence IPS's don't require UK-wide IP backbone networks.

  4.19  Onward connection of some sort is however required in order to achieve global access for their customers. Small ISPs generally buy "interconnect" from larger ISPs that operate their own networks that link into major US backbone networks. Trans-Atlantic bandwidth will therefore be a more important factor than a UK-wide network when looking at the competitiveness of the UK dial-up Internet access market.

  4.20  In light of this, the recently-announced WorldCom/MCI-Sprint merger is particularly significant. This proposed merger is currently under review by the European Commission, under the EC Merger Control Regulation and by the FCC in the US. As agreed at the meeting between BT and OFT/Oftel on 21 December 1999, we attach a copy of our comments to the European Commission regarding this proposed merger.

  4.21  It is clear that the proposed merger raises very significant competition concerns, which may well have a serious impact on the future development of e-commerce services. The following table sets out the estimated US Internet wholesale market shares as of the end of 1998. It indicates that the combined WorldCom/MCI-Sprint entity would have a market share of 51 per cent:


  4.22  In 1998, when WorldCom and MCI merged, one of the conditions imposed by the European Commission for approving the merger was that MCI would divest itself of its Internet backbone assets and customers; these were duly divested to Cable & Wireless in 1998. This divestment was not, however, as effective as anticipated by the regulatory authorities, as many customers have remained with the merged WorldCom/MCI and have not migrated to Cable & Wireless. It can be expected that a similarly unsatisfactory situation would occur if the WorldCom/MCI-Sprint deal were approved subject to a requirement that Sprint divest itself of its Internet backbone assets and customers.

  4.23  It is likely that the WorldCom/MCI-Sprint deal would result in a number of anti-competitive effects. The merged entity would be of a significantly larger size relative to all other backbone providers and would, as a result, gain huge market power from network externalities. In other words, the merged firm would be better placed than any of its competitors to capture future growth through new customers, because of the attractions for any new customer of connections with the largest network and the relative unattractiveness of competitor offerings due to the threat of disconnection and degradation of peering. In other words, this "virtuous circle" would mean that the addition of extra customers would create an incentive for content providers to want their content on the merged network and this in turn would create an incentive for more customers to join the network as opposed to competitors' networks and so on ad infinitum.

5.  CONCLUSIONS

  5.1  The comments set out in the present paper are simply intended to provide a general overview of some of the issues that will be relevant to the development of competition in e-commerce markets. Whilst it is not intended, on the basis of this general overview, to set out detailed suggestions for regulatory action or regulatory reform, the following general points should be noted:

    —  E-commerce markets are international in nature and many of the legal concerns relating to the development of e-commerce are being addressed at an international level. The UK should encourage and support international initiatives to address these legal issues.

    —  As indicted in the FCC paper referred to above:

      —  Do not automatically impose legacy regulations on new technologies,

      —  When Internet-based services replace traditional legacy services, begin to deregulate the old instead of regulate the new; and

      —  Maintain a watchful eye to ensure that anti-competitive behaviour does not develop, do not regulate based on the perception of potential future bottlenecks, and be careful that any regulatory responses are the minimum necessary and outweigh the costs of regulation".

8 February 2000





3   "Regulating Communications: the way ahead". Back

4   For further information on the competitive position of the cable companies, see BT's November 1999 response to Oftel's Consultative Document of July 1999 on the price control review, at pages 47-54. A copy of this response has been provided to both Oftel and the OFT. Back


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2000