COMPETITION IN E-COMMERCE MARKETS
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
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
"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
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.
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
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
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 Internetcommunication 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.
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:
|Switching Costs||Low with multiple suppliers
||High when integrated with e-frastructure; few qualified suppliers
||Long-term, mission critical|
|Transaction Type||Smaller average selling price
||Larger average selling price|
|Revenue Model||Traffic 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
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
"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".
3.2 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
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
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.
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 AccessUK:
The Rise of Non-PC Platforms" predicts that by 2003 the percentage
of UK households with an Internet compatible PC will rise to 45
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:
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.
Inteco estimates that TV-based Internet access is likely
to reach over 40 per cent of UK households by 2003.
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
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".
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
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
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.
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 distributionthe
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.
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, Yahoowhich is
best known as the leading search engine on the Internethas
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
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
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.
5.1 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
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
8 February 2000
"Regulating Communications: the way ahead". Back
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