Regulation, Business Strategy and R&D; Expenditure in Digital Television
(Theme 1: European Regulation and the Science Base)

Professor Martin Cave
Mr Mark Shurmer
Mr Campbell Cowie


Objectives

The aim of the project is to investigate the role which firms' business strategies and regulation, particularly at the European level, are having on the development of advanced television services such as high definition television (HDTV) and digital television. Its key objectives are:

  • to extend the framework for analysing the conduct of European regulatory and standardistion bodies in order to examine their impact in shaping the technological development of the television industry

  • to develop through a series of interviews with broadcasters, manufacturers and policymakers and through analysis of published data sources a body of quantitative and qualitative evidence concerning firms R&D; expenditures and competitive strategies in the digital broadcasting arena

  • to contrast European legal, political and administrative approaches to regulating industrial cooperation in the industry with those applied in Japan and the USA

  • to make policy recommendations on appropriate European level regulation and standardisation of communications industries, and to contribute to the policy debate on UK and European approaches to digital broadcasting

Results

The research builds upon two streams of previous analysis, concerned respectively with broadcasting policy and standard setting. Existing analogue broadcasting technologies provide relatively poor quality pictures and are not economical with spectrum. Terrestrial channel scarcity has in recent years been relieved by two sources - cable and satellite delivery. EU Member States differ significantly in rates of cable penetration, with larger countries such as the UK and France lagging behind others, such as the Benelux countries. Cable systems are also expensive to install. In contrast, satellite permits immediate coverage within a footprint containing much of Europe's population, but subscribers have to acquire reception equipment, in the form of dishes and decoders. Although at present terrestrial, cable and satellite delivery within Europe rely almost entirely on analogue technology, over the next few years, however, all are likely to switch to digital, which offers more channels and higher quality funding. Managing this transition is a major project for governments, broadcasters and equipment suppliers.

At the heart of these prospective changes lies the issue of standards. Analogue terrestrial television worldwide uses three standards. In the mid 1980's, the European Commission and certain Member States with substantial equipment manufacturing industries sought to promote a new high definition standard, but the effort failed miserably through technological obsolescence and lack of a market. Since 1993, however, European governments, broadcasters and equipment manufacturers have come together to develop digital broadcasting at the European level, combined with more specialised national groupings, illustrate a new approach to cooperative R&D; in the field of standard-setting.

The pre-competitive phase of the DVB now complete, the broadcasting industry is engaged n bringing the new technologies to market. In our analysis of the industry we have identified a series of successive vertical stages which must be combined before new analogue or digital services can be provided. These stages are: programme acquisition, programme packaging, delivery, customer reception and revenue generation. Throughout Europe, companies are seeking to form alliances which bring these elements together. In Franceand the UK, the existence of dominant suppliers of pay television (Canal+ and BSkyB respectively) gives them a considerable first mover advantage, subject to the difficulty of migrating analogue customers to digital services. In Germany, by contrast, rival groups are vying to enter the market first, BSkyB lying first with Bertelsmann and most recently with Kirch.

These developments have attracted the attention of European governments, and of the EC. If in the 1980's, pressure on government policy came primarily via equipment manufacturers, within the framework of policies to promote national champions such as Philips and Thompson, in the 1990's policy has been more concerned with the issue of sustaining competition. Among the activities essential for broadcasting identified above, it appears that the principal bottlenecks in control over essential sports rights and (to a lesser extent) film rights, and in the encryption or "conditional access" systems necessary for broadcasters to generate revenues. Concern about the latter provoked the Directive on Advanced Television Services passed by the European Parliament and commission in 1995, which mandated access to conditional access systems, which were also required to be licensed. However, the legislation has not required the use of "multicrypt" set-top boxes, capable of implementing a variety of propriety conditional access technologies. The bottleneck thus remains, but it is regulated. The legislation also applies only to digital services, leaving existing analogue encryption technologies subject only to competition law.

In the UK the Directive has been incorporated in the 1996 Broadcasting Bill expected shortly to receive the Royal Assent. The task of regulating digital conditional access systems will be entrusted to OFTEL (against the wishes of the Independent Television Commission).

Pay TV service in the UK has been the subject of two investigations by the competition authority, the Office of Fair Trading. The second investigation concluded that a reference to the MMC was not necessary, because BSkyB was willing to offer further undertakings with respect to the structure of its wholesale prices for programming to cable operators, the preparation of separate accounts for its wholesale and retail activities, and an undertaking linking prices charged for its analogue conditional access services to fully allocated costs.

Our project has involved the tracking of these developments as they occurred, and we have also intervened in the process in a small way, through advice to industry and Government players. As a result, we are still digesting the lessons of these continuing developments. However, in relation to the central issues of standard setting and competition policy, we have reached the following conclusions:

  • The DVB project represented a major advance in standard setting in broadcasting, as a result of speed of operation, the participation of broadcasters and equipment manufacturers, and its focus on the marketability of the final service, rather than on engineering developments

  • However, and not surprisingly, participants in the project were unable to cope with the major point of commercial conflict between existing pay broadcasters and potential entrants - the status of proprietary technology in the conditional access system

  • Resolution of this matter was left to the European Directive on Advanced Television Services incorporated into such national legislation as the Broadcasting Bill 1996; the adequacy of this legislation from a competition policy standpoint has yet to be assured

  • Given the variety of potential delivery technologies for digital entertainment services (cable, digital terrestrial, digital satellite and video on demand over standard telephone lines) and the uncertainty surrounding the nature of demand for the project, government policy, as well as incorporating standard competition policy concerns about access to bottlenecks, should be strictly neutral among competing delivery technologies

References/Further reading

M.Shurmer 'Information Superhighway or Information Superskyway?' Advanced Television Market (with J.Foley). This paper was presented to the 13th Annual Conference on Fibre Optic Communications and Networks, Brighton, 27-30 June 1995, and published in the conference proceedings. Key findings of this component were also presented at the Hewlett Packard Research Labs in Bristol (June 1995)

M.Shurmer 'Terrestrial Digital TV: The Challenges of Transition' Advanced Television Markets ATM Amsterdam 95 Issue pp. 14-20 Paper presented at the International Broadcasting Conference, Amsterdam and published in conference proceedings (Sept 1995)

M.Cave and M.Shurmer 'Business Strategy and Multimedia Regulation in the UK' Communications and Strategies Issue 19 pp. 117-140 (1995). (Also presented at the EC HCM Network meeting in Berlin, October 1995.)

M.Cave 'Traffic Management on the Superhighway: reforming communications regulation' in R.Collins and J.Purnell (eds) Managing the Information Society IPPR (1995)

M.Cave 'The Lean Controllers: New patterns of Regulation?' Demos Quarterly no.4 (1994)


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