Jean-Eric de Cockborne, Bernard Clements and Adam Watson Brown

(This is the text of a paper presented on 14 June 1999 at the Montreux Symposium '99)
The views expressed are those of the authors, and not necessarily those of the European Commission

Several different but co-ordinated initiatives contribute to the European Union (EU) policy development in the area of multimedia services. The public consultation on the EU Green Paper on convergence highlighted the need for a more horizontal approach to regulation, and for a separation between the regulation of content services and the communications transport infrastructure which carries them. Of course it is not always possible to achieve a complete separation, for example in dealing with competition problems arising from the dominance of vertically-integrated players. However, provided such relationships can be taken into account, horizontal separation is more suited than the current vertical approach in the face of shifting sands caused by increasing technological and market convergence. It facilitates a coherent approach, especially to the regulation of infrastructure, and ensures that regulatory measures can more accurately target specific policy objectives in either content or infrastructure areas.

Implementing a more horizontal approach will require considerable regulatory reform. An opportunity to carry out reforms to the regulatory framework for infrastructure and associated services will be provided by the forthcoming review which is already foreseen in the Community telecommunications legislation formulated for the opening of markets to full competition in 1998 (the1999 Review). Reform of content regulation may involve either adjustments to existing legislation (for example, to the Television without Frontiers Directive when this comes up for review in 2002) or entirely new measures (e.g. the proposed Directive on Electronic Commerce or the proposed Copyright Directive).

It is not the purpose of this paper to describe the whole field of endeavour. In keeping with the theme of this session, we concentrate only on one aspect of infrastructure regulation – the problem of dealing with the competition concerns arising from the ownership and operation of so-called digital gateways. These are typified in the current market for digital television by conditional access services, but may be followed by others in this and in adjacent markets, as we demonstrate below.

The regulation of digital television in the European Union is governed by the terms of the so-called Television Standards Directive, adopted on 24 October 1995. At the time of the adoption of the Directive, it was clear that advanced television services based on digital technology would become technically and economically feasible. The Directive’s prime objective was to establish a regulatory regime adapted to the start-up phase of new digital TV services on the one hand, while providing adequate continuity with the earlier regulatory environment for advanced TV services based on analogue technology on the other.

Measures in support of the Directive’s prime objective fall into two categories:

• Rules relating to technical standards for digital television broadcast via cable, satellite or terrestrial means, but including also a requirement for the use of a common European scrambling algorithm. The former unify European digital broadcasting standards in a market-led process, avoiding a repetition in the digital era of the divide caused by the rival and variant analogue standards of today’s colour television. The use of a common scrambling algorithm also helps with interoperability between different conditional access systems.
• Rules governing the economic behaviour of market players, particularly those requiring them to grant to third-parties access to their conditional access services on fair, reasonable and non-discriminatory terms. These were introduced because it was appreciated that the use of proprietary technology in this application could, if uncontrolled, lead to the creation and abuse of dominant positions to the detriment of fair competition and user welfare. These rules are in addition to applicable competition law at the Member State and European levels.

The Directive therefore regulates digital television in two ways: first through technical rules - notably an insistence on standards for transmission plus the fulfilment of some basic interoperability requirements – second through behavioural rules for conditional access. This combination constitutes a measured balance between the objective of encouraging innovation and investment by industry in the start-up phase on the one hand, while protecting the consumer interest and promoting fair competition on the other hand.

The requirements for openness and interoperability are evident; the key issue is how to implement them. The traditional way in broadcasting is to mandate open standards from the outset of any new broadcasting market. However in dynamic markets, characterised by rapid technological change, this approach tends to place regulators in the position of choosing standards. The risk is that the regulator will make the wrong choice. A second problem is that proprietary technologies often evolve much more rapidly than open standards which need extensive committee work, as we know from decades of European Broadcasting Union (EBU) working groups and more recent Digital Video Broadcasting (DVB) efforts. The legislator and the regulator thus face a difficult choice. A refusal to tolerate proprietary standards could dampen innovation and be disproportionate. On the other hand, proprietary standards do carry a high risk of market foreclosure.

The TV standards directive allows proprietary conditional access systems embedded in Digital Television (DTV) decoders. It attempts to protect the public interest in a proportional way by requiring that these systems be made available on "fair, reasonable and non-discriminatory terms" to third-party broadcasters and manufacturers wishing to build consumer equipment. Of course those offering proprietary systems risk much greater regulatory scrutiny compared with those using open systems. Open systems carry a presumption of regulatory compliance, a factor which will lead suppliers to support and use the DVB’s Multimedia Home Platform (MHP) architecture once it becomes available (see below).

An open-architecture approach to conditional access, The so-called Common Interface was, however, conceived at an early stage. The Commission contributed significantly to the work of the DVB aimed at ensuring that the Common Interface reached specification stage and was available for any broadcaster wanting to choose it. The TV standards directive implicitly allows both Simulcrypt (interworking between different proprietary conditional access architectures) and the Common Interface (sometimes dubbed Multicrypt) as means of implementing interoperability to enable a "one box" solution for the consumer, subject to prior commercial agreement in the case of Simulcrypt. To have mandated the common interface would have impeded the pay-TV operators’ business model (generally based on subsidising decoders from service revenues) and therefore the need for some return on that investment. We intend to revisit the issue in the public consultation on the associated 1999 Review later this year.

The Applications Programme Interface (API) is a new element in decoder architecture. It fulfils tasks that most people would associate with traditional operating systems like MS-DOS. In the PC world, Windows is the key API. It defines how applications are displayed and managed. It acts as the intermediary between the application and the operating system. Windows has extended its functionality upstream from applications and has replaced the MS-DOS operating system.

Early generations of decoder had no APIs, only a very basic operating system. As costs have fallen and processing power has increased, more recent decoders have included APIs. In order to progress beyond ordinary broadcasting to the new interactive services described below, an API is essential. A sophisticated Electronic Programme Guide for navigating across hundreds of channels of broadcasting also needs an API.

The most popular APIs currently used in Europe are Open TV and MHEG. Of these, only Open TV is controlled by a conditional access provider, Mindport (formerly Irdeto). Note that the DVB group did not develop a first generation API because other systems already existed and operators were committed to them. Until MHP is ready, broadcasters needing to select an API have a difficult choice to make. Most digital terrestrial television (DTTV) broadcasters have chosen MHEG-5 because it is an open system, even if it is no longer on the leading edge of technical developments; DAVIC tests have proved that migration to Java, possibly through an intermediate stage, MHEG-6, is feasible. MHEG supporters argue that its functionality is adequate for the early stages of the market. UK terrestrial broadcasters are using a combination of MHEG and Media Highway, the Canal+ API. Open TV is another proprietary system which has been successful in the European market – notably in Germany and Scandinavia - because broadcasters find its functionality attractive.

Formally the TV standards directive does not cover the issue of access to Application Programme Interfaces (APIs). However, in the UK, Oftel is regulating the availability of BSkyB’s Open TV API. They are able to do this because in this case the API is configured to run under the Conditional Access system, regulated by the Directive. Although the Commission services have not yet completed analysis of the UK transposition, and I must therefore reserve final judgement, it would seem to me that Oftel’s approach applies the spirit of the TV standards directive to this new gateway: proprietary technology is acceptable, but must be made available on "fair, reasonable and non-discriminatory terms". For APIs, this includes the necessary interfaces for authoring applications or for running converter algorithms on applications authored for another API.

Defining an open API is the most substantial task in the MHP exercise and takes DVB members into a new software-led environment for receivers that is much more flexible than the hardware approach that characterised analogue and the early stages of the digital market. The possibility to replace software – by downloading new versions and to achieve backward compatibility between Digital Video Broadcasting-Java (DVB-J) and existing APIs through plug-ins – will be significant. It will mean that the market is no longer a prisoner of proprietary technologies, thanks to the migration possibilities afforded by software. This is another argument for tolerating proprietary technologies in the market with appropriate access safeguards. It allows open solutions like the MHP to emerge through accumulated good practice, rather than through prior regulators’ mandate. As these open systems will support a number of business models, market players are likely to see cost advantages in the longer term.

At this stage, it would therefore be inappropriate in our view for governments to consider mandating a particular API, given that there is no consensus on a single API, and given that technologies are evolving rapidly. In any event, for EU Member States, any such measures would first have to be notified to the Commission under the Transparency Directive 98/34/EEC, since they would constitute prima facie excursions beyond the terms of the Television Standards Directive.

The key regulatory issue affecting APIs currently is that adequate interface information should be available to other broadcasters for writing their own applications. There is scope for debate on how much information needs to be made available and the timeliness with which it should be made available to achieve non-discriminatory access for third parties. There is however no absolute requirement that the whole API should be entirely open or standardised. The comparison with computer browsers is instructive. No one would dream of standardising them because technology and the market are developing so fast.

Lack of standardisation raises the issue of interoperability. The German public broadcasters had developed a book-marking application for their EPG, running on Open TV. They criticised the D-Box API for being unable to support this application and for being inferior to Open TV. Beta Techniek argued that Open TV was not a system developed by the DVB group and therefore there was no particular reason to take it into account.

Broadcasters also face the difficulty of converting applications if different APIs are in use, say on satellite and cable. It is of course possible to author for one API and then use a translation algorithm to convert the application to another API. The effectiveness of translators depends again on the availability of published interface information on the API. Even so, there must be some additional overhead for the broadcasters and the availability of different systems within a particular territorial market is unlikely to be an incentive for broadcasters to develop interactive applications.

APIs do have the potential to become bottlenecks. However, the increasing flexibility of the technology may mitigate the situation. Most recent decoders can import or delete applications – raising the issue of who is responsible, on what terms, discussed below - and APIs can also be updated. For instance the D-Box only contained a simple API when launched, but was upgraded earlier in 1999. Assuming adequate memory in the decoder, it would be possible to have two APIs resident. Free import/ export of APIs is foreseen in the DVB Multimedia Home Platform architecture. The DVB is in the process of defining a single API for the future MHP, together with migration paths for existing systems.

Electronic Programme Guides (EPGs) are a navigation aid similar to browsers in the PC world. EPGs will become increasingly important for users as the number of digital channels in a bouquet increases; also for PPV/NVOD (pay-per-view and near video-on-demand) transactional services, and Information Society services such as Internet access and electronic commerce generally. The ergonomics and presentation of the EPG will be an important element of competition between bouquet providers.

Since branding and presentation are essential to both the EPG editor and third party broadcasters appearing within the bouquet, there is potential scope for conflict. This would normally be resolved through contractual negotiation, when a broadcaster joins the bouquet. This still leaves the issue of free-to-air broadcasters (FTA) – and copyright-restricted FTA broadcasters. Art. 4a indent 2 of the Television Standards Directive currently ensures that all decoders must pass FTA transmissions, in respect of audio and video. The issue is how far FTA broadcasters will need access to other facilities like the API and the EPG in future and on what terms. Clearly, Art 4a will lose its value if FTA broadcasters are only able to pass video and audio through decoders and not the entire service, including interactive elements and navigation aids. This would tend to devalue the services of FTA broadcasters when received through proprietary decoders, which will not pass these elements.

A key element is the service information (SI). This can be used as a simple programme guide in raw form. Sophisticated EPGs use the SI broadcast with each bouquet to update their listings. A particular operator’s EPG may not recognise another broadcaster’s SI and therefore only be able to identify its own channels and not those of third parties.

Again, it is quite possible that EPGs will only be a transient bottleneck, rather than a static, essential facility, as technology evolves.

Numerous references have already been made to the DVB’s development of the Multimedia Home Platform (MHP). The MHP is an ambitious attempt to define a convergent systems architecture for the home beyond traditional television and broadcasting markets. MHP is a software-engineering exercise that looks forward to a new, convergent communications paradigm. Digital television is only the starting point for the activity, which integrates extensive computing and telecommunications elements. To quote one leading participant, "The underlying general objectives of the [user] requirements are to build a bridge between the hardware and the software worlds, the consumer electronics and computer worlds, and the existing and future business environments". If it fulfils its promise, MHP will provide a strong, alternative platform for convergence, in competition with the Microsoft/Intel PC platform and Windows CE, an operating system extrapolated from Windows for consumer electronics, which has recently been upgraded to include HTML.

MHP is intended as an open architecture which will enable the market to mature. A key objective is to enable the market players to migrate gradually away from decoders containing significant proprietary technologies which limit interoperability. MHP recognises that exclusivity and some gatekeeper control were necessary to secure investment at the start of the market; but the underlying philosophy of MHP is that future market development will demand a greater degree of interoperability between consumer equipment. MHP therefore embodies the transition discussed earlier, the move from vertical to horizontal markets.

Like earlier DVB systems, the technological specification for MHP is based on user requirements drawn up by the market players. The scope of the MHP comprises the home terminal – whether it is a decoder, IDTV or multimedia PC – and associated peripherals such as storage devices – hard disk drives and video recorders for instance – plus a home network architecture to enable the distribution of signals around the home.

One of the key objectives is to enable gradual migration from current proprietary APIs towards a common, open API. Present work favour the use of the Java language developed by Sun Micro Systems Inc. Java’s major advantages are platform independence and greater sophistication compared with current APIs. Java is well-established in Internet applications. Java does however require more powerful hardware; development work is in hand to produce a subset of the powerful computer specification to run within the more constrained environment of DTV decoders. Java could interwork with current products if they could be fitted with a "plug in" to act as an intermediary between their resident API and Java.

Concerns have been expressed regarding the current vertical integration of the DTV receiver market. Subsidies made possible by this structure have the effect of lowering the entry barrier for consumers posed by the initially high price of DTV equipment. This offsets to a certain extent any perceived loss of choice. Manufacturers’ impatience with vertical markets is a matter of record. There is in particular a debate on the opportunity to market integrated digital TV sets (IDTV) at a time of rapid technological change, rather than relying on more easily replaceable decoders, at least until the MHP specification is available. The key issue is whether regulators should underwrite manufacturers’ risks in respect of IDTVs or whether such choices should be left to the market. We will raise all these issues in the report on the TV standards directive to be published later this year. We will also promote a fertile debate on any changes to the regulatory framework in the 1999 Review.

The strategic issue is not openness itself, but how best to achieve it. There are no easy options for market players and regulators at a time of rapid technological change. New technologies bring new business models and new regulatory paradigms.

The TV standards directive has provided a market-led framework for DTV systems development which has contributed to the global uptake of DVB transmission systems. This contrasts with the earlier European model where regulation, rather than user requirements predominated.

Despite late transposition in most Member States – and some significant transposition difficulties – the directive has provided some certainty for the first phase of the market dominated by pay TV. Operationally, key measures regulating conditional access have worked best in Member States where pay TV was already well-established. The market actors’ familiarity with the directive played a role, also the greater understanding of regulators used to pay TV. In other markets, telecom regulators used to transposing the heavy telecoms regulation intended to control dominant telecoms operators have not brought a light touch to what is an entirely different situation, a new market starting up.

Competition law has played a strong role in other markets like Germany and Italy where pay TV is not well-established. The extensive investments needed to develop pay TV and simultaneously launch digital TV services have led to ventures which pose a high risk of market foreclosure. The oligopolistic structure of broadcasting in most Member States makes it hard for competition authorities to accept any new combination of existing players to address new markets. Member States and broadcasters themselves have rejected complete liberalisation of broadcasting, which would make clearance under competition law easier. However, investors from outside a particular Member State can help break the vicious circle and allow such markets to start, albeit after a considerable delay.

The emerging gateways discussed above will play an increasing role in the market and have bottleneck potential. It is essential that regulators avoid a static view, that these new functions will be "essential facilities" forever, for instance. Over-regulation risks slowing technical progress and paradoxically prolonging the "bottlenecks" it set out to solve.

Government support of DTTV is a global phenomenon. Despite some important queries over its viability and long term prospects, policymakers in Japan, USA and Europe want terrestrial broadcasting to continue in the digital era for reasons which are not often explicit. These would include: fulfilment of traditional broadcasting policy objectives – harder to guarantee through other delivery mechanisms - including the provision of a safe haven for public broadcasting, and protecting political and cultural diversity.

As there will always be scarcity of spectrum and bottlenecks will tend to be even narrower for DTTV, it will require higher levels of regulation. Applying new technologies to old business models is however a high risk activity since new technology produces new business models. Governments risk increasing pressure to regulate in support of promotional objectives, rather than adopting a neutral posture. However, European governments have not been as interventionist as others; one should note the FCC’s promotion of high definition television through imposition of one standard (ATSC) and spectrum allocation - in this context.

The next phase of the European DTV market will be dominated by DTTV FTA services. In Europe, government support and good planning by the market actors themselves have transformed the prospects of DTTV. Future government initiatives will be important for the development of the whole DTV market. Analogue turn-off is interesting in this context. Key issues are regulatory neutrality and the reallocation of terrestrial frequencies recovered to broadcasters or other users. Any future expansion of DTTV spectrum allocations against other terrestrial spectrum users as services develop will also be significant. Regulatory neutrality, transparency, optimal economic use of spectrum, and defined public interest objectives, will all be significant factors.

It is clear that the directive does not address all the potential bottlenecks within the rapidly evolving DTV environment. From the perspective of convergence, it does not regulate the conditional access function of interactive DTV services since it is limited to broadcasting services. Nor does it regulate conditional access when applied to non-broadcast services like VOD, which are a possible competitor to DTV services.

From the consumer perspective, all these developments represent a massive increase in choice. Consumers will need time and enough scope for manoeuvre to take decisions that have traditionally been made by regulators and market actors on their behalf. Regulators will need to facilitate educated choice and avoid over-protecting or steering consumers towards particular choices.

Before addressing the substance of any changes to regulation, one must first reflect on how to achieve them. The strategic question is whether to entrust the policing of these new bottlenecks to competition law or whether to extend ex ante regulation. This falls into the long-running debate between the two approaches.

Proponents of competition law argue that its principles do not go out of date and can address all new technology bottlenecks as they emerge. Apologists for specific regulation maintain that it provides certainty for investors to plan their investments; a posteriori application of competition law on a case-by-case basis cannot provide certainty, they claim. Proponents of competition law argue that guidelines can be prepared once a sufficient number of cases has been decided to enable general principles to be drawn. Proponents of ex ante regulation reply that the initial requirement for sacrificial lambs acts as a deterrent and moreover accumulated delays from successive cases - as in the German DTV market – mean there has to be an easier approach. There is also a thriving academic debate on whether competition analysis techniques honed in more static sectors can keep pace with the analytical requirements of dynamic markets, characterised by a high level of technological change.

The market actors themselves are divided on this issue. The Convergence Green Paper consultation produced both general support for the light, market-led approach of the television standards directive and the hope that competition law would take an increasing importance in this area.

Within these two approaches, the Commission can identify three options.

1) Leaving the current directive in place and relying on competition law to address new bottlenecks. There has arguably been an adequate sequence of DTV competition cases to enable the competition authority to draft guidelines.

2) Updating directive 95/47. Potential modification of directive 95/47 would mean a deepening of its scope: extending the "fair, reasonable and non-discriminatory terms" of Art 4 - third party use of CAS - to the new potential bottlenecks: APIs; EPGs; memory and storage facilities. The scope would be widened to cover the DTV return channel and non-broadcast use of all these bottleneck facilities.

3) Extrapolating a general set of access principles from the directive and launch an entirely new directive which would replace directive 95/47 in the framework of the 1999 Telecom Review. This would be much broader than DTV and could include access to all electronic communication infrastructure such as the telephone network or cable television networks. It is less likely to go out of date than a simple update of the directive.

A major disadvantage shared by (2) and (3) is the two-year legislative cycle for adopting legislation under the European Union co-decision procedure. The market is going to develop rapidly during that time. There would need to be some interim solution, either to rely on the competition laws – in which case option (1) might be the better choice – or for the Commission to draft some interim access guidelines for NRAs, pending the adoption of legislation.

The Commission will be making one or more proposals to address the evolving regulatory needs of the DTV sector within the frameworks of the 1999 Telecoms Review and the follow up to the Convergence Green Paper.