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COM(97)623

GREEN PAPER ON THE CONVERGENCE OF THETELECOMMUNICATIONS, MEDIA AND INFORMATIONTECHNOLOGY SECTORS, AND THE IMPLICATIONS

FOR REGULATION

TOWARDS AN INFORMATION SOCIETY APPROACH

European Commission Brussels, 3 December 1997

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EXECUTIVE SUMMARY

The Background - Convergence

There is widespread agreement that convergence is occurring at the technologicallevel. That is to say that digital technology now allows both traditional and newcommunication services - whether voice, data, sound or pictures - to be providedover many different networks.

Current activity in the market suggests that operators from the sectors affected byconvergence are acting on the opportunities provided by technological advances toenhance their traditional services and to branch out into new activities.Telecommunications, Media and Information Technology sectors are seeking cross-product and cross-platform development as well as cross-sector share-holding.Examples of new products and services being delivered include:

– Home-banking and home-shopping over the Internet,

– Voice over the Internet;

– E-mail, data and World Wide Web access over mobile phone networks, and theuse of wireless links to homes and businesses to connect them to the fixedtelecommunications networks;

– Data services over digital broadcasting platforms;

– On-line services combined with television via systems such as Web-TV, aswell as delivery via digital satellites and cable modems;

– Webcasting of news, sports, concerts and of other audiovisual services.

Such developments represent concrete examples of an Information Society inEurope. They show its potential to touch the lives of every citizen. They also highlighta significant change in the range and diversity of traditional telecommunications andmedia services.

The Issues - The Stakes for Europe

The implications of these developments are far reaching. Convergence is not justabout technology. It is about services and about new ways of doing business and ofinteracting with society. The changes described in this Green Paper have thepotential to substantially improve the quality of life for Europe’s citizens; to betterintegrate Europe’s regions into the heart of the European economy, and to makebusinesses more effective and competitive on global and national markets.

The emergence of new services and the development of existing services areexpected to expand the overall information market, providing new routes to the citizenand building on Europe’s rich cultural heritage, its potential for innovation and itscreative ambitions.

The global nature of communications platforms today, in particular, the Internet, areproviding a key which will open the door to the further integration of the worldeconomy. This will open opportunities and challenges not only for the EuropeanUnion, but also for our neighbours in Central and Eastern Europe, the Mediterranean,and more broadly, in the developing world. At the same time, the low cost of

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establishing a presence on the World Wide Web, is making it possible both forbusinesses of all sizes to develop a regional and global reach, and for consumers tobenefit from the wider choice of goods and services on offer. Globalisation willtherefore be key theme in future developments, as changes in Europe are mirrored bydevelopments all over the World.

If Europe can embrace these changes by creating an environment which supportsrather than holds back the process of change we will have created a powerful motorfor job creation and growth, increasing consumer choice and promoting culturaldiversity. If Europe fails to do so, or fails to do so rapidly enough, there are real risksthat our businesses and citizens will be left to travel in the slow lane of an informationrevolution which is being embraced by businesses, users and by Governmentsaround the World.

Governments and policy makers will have a key role in ensuring that such anenvironment is in place. However, beyond the regulatory framework which is thecentral focus of this Green Paper, efforts will continue to be needed, as recognised atthe recent Jobs Summit, to equip Europe’s workforce with the skills which theInformation Society requires. Continuing support should be given to research anddevelopment activities. Governments, regional and local authorities, as well as theEuropean institutions must lead, by example, by fully embracing the technologies andservices which the process of convergence is making possible.

Getting the regulatory framework right is of crucial importance

The future regulatory environment will be of crucial importance. The European Unionhas already developed a comprehensive framework for managing the transition intelecommunications from a monopoly to a fully competitive world from 1 January1998. We have also put in place a framework supporting an internal market forbroadcasting. Getting the right regulatory framework must be firmly placed withinthese existing achievements. At the same time, this Green Paper represents amilestone in allowing the Community to look beyond the 1998 deadline and to assessthe implications for the sectors affected by convergence.

This Green Paper argues that the development of new services could be hindered bythe existence of a range of barriers, including regulatory barriers, at different levels ofthe market. There are, however, differing views on the adequacy of existingregulatory frameworks to deal with the changing environment. One view is that thedevelopment of new products and services is being held back by regulatoryuncertainty - that existing rules were defined for a national, analogue and mono-mediaenvironment, but that services increasingly cut across different traditional sectors andgeographical boundaries, and that they may be provided over a variety of platforms.This calls into question the underlying rationale beneath regulatory approaches in thedifferent sectors affected by convergence. Proponents of this view would argue thatsuch regulatory uncertainty holds back investment and damages the prospects forthe implementation of the Information Society.

An alternative view would hold that the specific characteristics of the existing separatesectors will limit the scope for service convergence. It further would contend that therole of the media industry as the bearer of social, cultural and ethical values within oursociety is independent of the technology relied upon to reach the consumer. Thiswould mean that regulation of economic conditions and that of the provision ofinformation services should be separated to ensure efficiency and quality.

These matters need to be debated and resolved. Finding solutions will need to takeaccount of the full range of interests in the various sectors affected by convergence.

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At the same time, the potential for change will be felt in different ways and at differentlevels (e.g. technology, industry, services and markets). Whilst digitalisation meansthat convergence is well advanced at the level of technology, this Green Paper doesnot automatically assume that convergence at one level inevitably leads to the samedegree of convergence at other levels. Equally, there is no assumption thatconvergence in technologies, industries, services and/or markets will necessarilyimply a need for a uniform regulatory environment.

The Forum for Debate - The Green Paper

This Green Paper responds to the requirement for debate. It is consciouslyinterrogative. It analyses issues, it identifies options and it poses questions for publiccomment. It does not take positions at this stage nor reach conclusions.

In Chapters I and II, the Green Paper analyses the convergence phenomenon - itstechnological underpinnings, current developments in the market, and their possibleimpact on the telecommunications, media and information technology sectors.

In Chapter III, actual and potential barriers are identified which may hold back thesetechnological and market developments. Some of these reflect current market orindustrial issues of the sectors affected by convergence, whilst others arise fromcurrent regulatory approaches. Some of these issues are already being dealt with inCommunity initiatives, (for example, in areas of intellectual property, mediaownership, electronic commerce and digital signatures) and where this is the casethose initiatives are identified. In other cases, these barriers serve as a basis forconsidering the need, if any, to adapt current regulatory frameworks in the light of theconvergence phenomenon.

Chapter IV provides a detailed discussion of issues associated with existing andpossible future regulatory frameworks or approaches. These issues fall into eightbroad areas:

• Definitions

• Market entry and licensing

• Access to networks, to conditional access systems and tocontent

• Access to frequency spectrum

• Standards

• Pricing

• Individual consumer interests.

The chapter concludes with a discussion of public interest objectives, options forpossible future regulatory models and issues raised at an international level.

Finally, in Chapter V, a set of principles for the future regulatory policy in the sectorsaffected by convergence are set out, and possible options for future regulatoryapproaches are identified as a basis for discussion.

The Commission believes that the 5 months public consultation period will allowbroad participation and debate around issues which are important for citizens,business and for the further development of the Information Society. Comments canbe sent in paper or electronic form, and the debate will be assisted by the creation of

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a specific web-site on which electronic comments can be accessed.1 There will alsobe public hearings during the course of the consultation. On the basis of thecomments received, the Commission intends to produce a Communication by June1998.

Conclusions - The Way Forward

This Green Paper represents a step on the way to securing the benefits ofconvergence for European social and economic development. The JuneCommunication, setting out the results of the public consultation, will allow politicalpositions to be taken by the European Parliament, the Council of Ministers, theEconomic and Social Committee and the Committee of the Regions, and for clearobjectives for future policy to be established.

This Green Paper initiates a new phase in the European Union’s policy approach tothe communications environment. As such it represents a key element of the overallframework put in place to support the development of an Information Society. It buildson the current strengths of the frameworks for telecommunications (launched by thelandmark 1987 Green Paper on telecommunication2) and for media (established byvarious Community legislative initiatives). This Green paper builds on theseachievements, and offers all interested parties an opportunity to comment on thefuture shape of regulation, in the post-1998 communications environment, in thesectors affected by convergence.

This first step is intended to pave the way for the development of an appropriateregulatory environment which will facilitate the full achievement of the opportunitiesoffered by the Information Society, in the interests of Europe and its citizens as the21st century begins.

1 World-wide Web address is http://www.ispo.cec.be/convergencegp. Both written and electronic comments will

be made available in paper form in parallel with the publication of the Communication on the results of theconsultation, subject to any requests made for confidentiality.

2 COM(87) 290 final

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TABLE OF CONTENTS

Introduction iii

I. Convergence - Definitions and Developments 1

1. Convergence - defining its scope

2. The enabling role of technology

3. Current market developments

4. Summary and questions

II. The impact of convergence on the relevant sectors 8

1. The social and economic context

2. Market trends

3. The consumer perspective

4. Summary and questions

III. Barriers to Convergence 15

1. Existing barriers

2. Potential barriers

3. Question

IV. Regulatory Implications 18

1. Challenge to existing regulatory approaches

2. Tackling the barriers - The regulatory issues

3. Meeting public interest objectives

4. Options for a future regulatory model

5. Issues at an international level

V. Principles and options for the future 33

1. Principles for future regulatory approaches in the sectors affected by convergence

2. Options for regulatory development

3. Timetable for future action

4. Conclusions

Annex: Existing regulation 37

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Introduction

The Information Society is becoming a reality. Itsdevelopment is fuelled by the rapid technologicalchange which is transforming the informationindustries. The nature and speed of thistransformation may pose new challenges topolicy-makers.

One of the most significant factors is theincreasing use by different sectors, notably thetelecommunications, media and informationtechnology (IT) sectors, of the sametechnologies. Evidence of such convergence hasbeen mounting in recent years with theemergence of the Internet and with the increasingcapability of existing networks to carry bothtelecommunications and broadcasting services.

The phenomenon of convergence is relatively newand a range of different views exist on what itsimplications are for society and for economicactivity. There is broad agreement thatdevelopments in digital electronics and softwareare creating the technological potential for a newapproach to the delivery and consumption ofinformation services. There is less agreement onhow much these developments will changeexisting practices and over what time-scales.Some consider that convergence will lead to thecomplete and rapid transformation of existingtelecommunications, media and informationtechnology services in such a way that thesecurrently separate groups of services will mergeinto one another, substantially blurring thepreviously clear distinctions between them.

Others feel that the specificity of the existingseparate sectors will limit the scope for serviceconvergence, and that the media industry has arole as the bearer of social, cultural and ethicalvalues within our society, independent of thetechnology relied upon to reach the consumer.This would mean that regulation of economicconditions and that of the content of informationservices should be separated to ensure efficiencyand quality. Others believe that, if it does occur, itwill evolve over an extended time-scale.

It is nevertheless clear that the implications ofthese developments are potentially far reaching.The emergence of new services and thedevelopments of existing services is expected toexpand the overall information market. This willprovide new opportunities for economic growthand employment. At the same time the newcommunication services environment will alsoprovide opportunities to enhance the quality of

European citizen’s lives, by increasing consumerchoice, facilitating access to the benefits of theInformation Society and promoting culturaldiversity.

These developments are therefore positive forEuropean economic and social development andshould be encouraged. Public policy will need toprovide a supportive environment for convergencein order to ensure that the potential opportunitiesare grasped in a timely fashion.

What is needed now is wide ranging and deepdebate on the convergence phenomenon and itsimplications as an input to such policyformulation. The objective of this Green Paper isto start such a debate.

This debate needs to be set into context inrespect of other important Commission actions inthe telecommunications, media and informationtechnology sectors. In particular, this debate iscentral to the future communications landscapefollowing the full liberalisation oftelecommunications services and infrastructureby 1 January 1998. The process started by theGreen Paper should ensure that during the overallreview of the effectiveness of the 1998 regulatorypackage for telecommunications (to take place atthe end of 1999), full account can be taken of theimpact of convergence on that sector.Furthermore, the Cable Review, carried out in thelight of liberalisation and more specifically as aresult of the commitment contained within theCable Directive3 and the (telecommunications)Full Competition Directive4 is the subject of aseparate Commission communication. Thereview aims to create an open and pro-competitivemarket structure in the provision oftelecommunications and cable TV networkswhich may have a significant impact on themarkets affected by convergence. In particular, itwill encourage competition and prevent theemergence of new anti-competitive gatekeeperpositions or bottlenecks. Vigorous competition inthese areas will encourage the development ofinnovative new services which will benefitconsumers in the European Community, and willprovide European industry and service providerswith the expertise to compete on global markets.

Against the background of ensuring a competitivebasic market structure, the timeliness of thisGreen Paper stems from the fact that new

3 Commission Directive 95/51/EC, OJ L256, 26.11.954 Commission Directive 96/19./EC, OJ L74, 223.96

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markets may develop rapidly, and that they willbe essentially global in nature. If the applicableregulatory frameworks in individual MemberStates or, indeed, in Europe are not appropriateto the development of these new markets andeven hinder their development, then Europe mayfind itself at a competitive disadvantage vis-à-visits more flexible global competitors. This couldrestrict consumer participation by limiting choiceand weakening consumer confidence in the newservices, and have negative consequences foreconomic growth and employment creation inEurope.

The Green Paper addresses the nature of theconvergence phenomenon, and focuses on theprovision of services and the underlying networksover which they are carried. It further deals withthe implications for both the shape and substanceof regulation which may arise from convergence.Although the Green Paper deals with certainaspects of the regulatory framework for serviceprovision, any future initiatives in this field wouldbe without prejudice to existing on-going workwithin the Commission or the implementation ofexisting Community legislation.

The Green Paper does not take definitivepositions with respect to new regulatorystructures. Indeed, it recognises thatconvergence may lead to less regulation intelecommunications and media sectors, andshould not lead to more regulation in areas suchas IT. Rather it analyses the convergencephenomenon as evident in the market; it identifiesissues relating to regulation arising from thesedevelopments, and it poses questions in relationto these issues.

All interested parties are invited to contribute tothe debate by responding to these questions andby making any submission they wish on the

subject. The period of such consultation is set forfive months from the date of publication of thisGreen Paper. It is intended to produce a reporton the results of the consultation by June 1998.

Submissions may be sent via E-mail, fax or post(4 copies please) to:

European Commission, DG XIII A4Attn. Mr. E. Lalor200 rue de la Loi, BU31 0/62B-1049 BRUSSELSBelgium

Fax (+32 2) 296 9009

and/or

European Commission, DG X C1Attn. Mr. G. Paulger200 rue de la Loi, L-102 5/25B-1049 BRUSSELSBelgium

Fax: (+32.2) 299 9201

and/or

E-mail: [email protected]

Hard copies of all submissions will be madeavailable at the conclusion of the consultation,unless a request for confidentiality is received. AWeb site has been opened for the posting of boththe Green Paper and submissions received. Theweb address is:

http://www.ispo.cec.be/convergencegp

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Chapter IConvergence - Definitions andDevelopments

This Green Paper represents a further step in therealisation of an Information Society in Europe. Itexamines a key set of policy issues relating tothe broad infrastructure of telecommunications,media and information technology sectors, forconvenience referred to as the ‘relevant’ sectors inmuch of this document.

The Green Paper does not examine policy issuesrelated to the wider set of services which willmake the Information Society a reality - servicessuch as Electronic Commerce, whichencompasses a range of activities having thepotential to revolutionise sectors as diverse asretailing, travel and financial services. The policyissues relating to this wider set of servicesinclude those where Community action is alreadywell advanced, for example, in intellectualproperty rights, copyright and related rights;media pluralism; privacy and data protection;encryption and digital signatures. These are partof the broader framework which is emerging fornew services and activities within the InformationSociety. They are therefore regarded as outsidethe scope of the Green Paper and are given onlypassing reference where relevant to the issues athand.

Instead, the Green Paper concentrates on theunderlying infrastructure which will helps createand deliver the services of the Information Societyto customers. It is made up of the systems ofcomponents, networks and services associatedwith the relevant sectors. In all three sectors,those systems are undergoing fundamentalchange, primarily through the application of digitaltechnology. This is likely to have consequencesfor policy and regulation.

The Paper focuses on the on-line delivery ofservices, dealing with off-line publishing, forexample, only insofar as it represents a potentialmarket for the on-line business.

The Green Paper deals with broad future trendsand does not attempt to define markets for thepurposes of the application of Communitycompetition law. The positions discussed in thisGreen Paper cannot prejudge the positions theCommission may take in the assessment ofpending or future cases under the competitionrules.

From this perspective, Chapter I describes theconvergence phenomenon and the technologicaldevelopments which underpin it. It also identifiescurrent developments in the market - and howsuppliers, service providers and consumers are

reacting to them - as indicative of the possibledirection of future change. As in anyconsideration of new markets, the activities ofsuppliers and service providers give the firstindication of how things might develop. Theirreactions are tempered by those of consumers,who must accept and embrace the new servicesbefore the markets can become a reality.

I.1 Convergence - defining its scope

The term convergence eludes precise definition,but it is most commonly expressed as:

• the ability of different network platforms tocarry essentially similar kinds of services, or

• the coming together of consumer devices suchas the telephone, television and personalcomputer.

This latter expression of convergence is one mostoften cited in the popular press - it is easilyunderstood by consumers and has the addedinterest of reflecting a wider struggle betweencomputer, telecommunications and broadcastingindustries for the control of future markets.

Despite this popular image however, anyconvergence of consumer devices is today muchless real than network convergence. Telecom-munications operators are already offeringaudiovisual programming over their networks(albeit on an experimental basis) and havebecome major players in the provision of Internetaccess, as well as backbone infrastructure.Broadcasters have provided data services overtheir networks for some years and these serviceswill be enhanced over the next 12-18 months bythe prospect of digital transmission of both radioand television, and by the addition of interactivity.

Cable operators are providing a range oftelecommunications services, including voicetelephony in some Member States and arestarting to deploy cable modems to offer highspeed Internet access, in addition to theirtraditional business of television programmingdistribution. Beyond the provision of services tothe public, both audio and video technologies arealso starting to be deployed within corporate‘intranets’ as an additional medium for distributingreal-time information. Such applications are alsostarting to appear on web sites targeted atprospective customers.5

The network platform and the consumer/userenvironment constitute two elements of thesupply or value chain extending from content

5 See Webcasting and convergence : Policy

implications. OECD, DSTI/ICCP/TISP(97)6 - to bepublished December 1997

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creation through content packaging, serviceprovision and final delivery to customers (seeFig.1). The value chain is a useful concept foranalysing the behaviour of firms and markets inthe light of convergence.

Source: Squires Sanders Dempsey LLP and Analysys Ltd.

Today, firms tend to be present in one or moreelements of the value chain. Some argue that ashift towards convergence will lead many oftoday’s current players to consider extendingtheir activities beyond their core businesses, andargue that this trend is already visible in somerecent mergers and acquisitions (see below).

The potential for change as a result of thephenomenon of convergence can be seen at threedifferent levels (technology, industry, services andmarkets) (see Fig 2) though there can be noautomatic assumption that convergence at onelevel inevitably leads to the same degree ofconvergence at other levels, nor that convergencein technologies, industries, services or marketswill necessarily lead to a need for a uniformregulatory environment.

Technology convergence, of which the examplescited above are illustrative, is based on thecommon application of digital technologies tosystems and networks associated with thedelivery of services. As section I.2 demonstrates,technological convergence is already happening,and continuing advances in technology will furtherconsolidate the process along the differentelements of the value chain.

Many commentators identify a trend towardsindustry convergence, seen in alliances, mergersand joint ventures which build upon the technicaland commercial know-how of the partners in orderto exploit existing and new markets. Suchalliances, mergers and joint ventures will continueto be subject to scrutiny under the Communitycompetition rules. Many such alliances are‘horizontal’, that is, between firms operating in thesame part of the value chain. Those aimed ataddressing the potential opportunities offered bymarket convergence generally involve companiesoperating in different parts of the value chain,resulting in increased vertical integration. Some

of these alliances have met with early difficulties,illustrating the uncertainty of the markets and therisks involved.______________________________________

Policy and Regulation

Services and Markets

Industry alliances and mergers

Technology and Network Platforms

Fig.2: The stages of convergence________________________________________________It is also difficult to be precise about the servicesarising from convergence. Many new services willresult from technological progress within givensectors, and may not result from cross-sectoralactivity at all. Others will be a direct result ofcross-fertilisation between sectors,telecommunications and broadcasting forexample. Where there is a suggestion of thelatter, the term “convergent services” will be usedin this document. Where a more generalreference is appropriate, the Paper will simplyrefer to the term “new services”, without signifyingany precise legal definition.

I.2 The enabling role of technology

This Green Paper is not primarily concerned withtechnology; rather it addresses the new businessand market phenomena which are being enabledby technological developments, and which arealtering traditional provider-consumerrelationships. An understanding of the nature ofthese developments can lead to a betterappreciation of the potential for change.

Digital technologies underpin convergence

As already stated, the underlying trend is thecommon adoption of digital technologies by therelevant sectors. Digital technologies cover arange of disciplines generally associated with thecomputer and telecommunications industries -digital micro-electronics, software and digitaltransmission. Applied piecemeal within each ofthe relevant sectors, these technologies havealready demonstrated their greater efficiency,flexibility and cost-effectiveness, and have shownhow they can enhance creative potential andpromote innovation.

Computer technology now plays a key role incontent creation and production in both cinemaand broadcasting worlds. The ways in whichaudio-visual material is produced, delivered andconsumed are evolving. Content is becoming“scaleable” so that it can be used in different

Content

origination

Content &

service

packaging

Service

provision

Infrastructure

provision

Activity

Content supplyTailoring &

branding

Platform &

connectivityDelivery Access control

UsersTerminal

vending

Function

Fig.1: The emerging value chain

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environments and delivered on different networkinfrastructures. The basic building block is theMPEG family of standards for the digital encodingof moving images.6 Once encoded in this format,images may be modified, manipulated, ortransmitted in the same way as any other digitalinformation. The systems and networks handlingsuch information are of course indifferent to thenature of the source material, be it image, soundor text. Digital source encoding thus forms thebasis of technological convergence.

Digital transmission may be carried overbroadcast networks or over terrestrial wired orwireless infrastructure. When applied tobroadcasting networks, the most significantimpact of digitalisation is the immediateexpansion of capacity, effectively removing ascarcity which has limited growth of the sectorsince its inception. But processing power andsoftware are also helping generalise consumerdevices like the set-top box. Implementingfunctionality in software helps overcome theproduct life-cycle problems associated withhardware, reducing market inertia and facilitatinginnovation. It also gives such devices a level ofintelligence which allows broadcasting networksto emulate the switching capabilities normallyassociated with telecommunications. Forexample, satellite pay-television operators cantoday address individual customers throughconditional access systems, often combined withthe terrestrial telecommunications network toprovide a ‘hybrid’ return path for interactiveservices.

Network technologies for convergence.

As alternative telecommunications infrastructuresbecome more widespread, high-speed networksbased on optical fibres will soon be capable, incombination with modern server technology, ofoperating cost-effectively in a virtual broadcastmode.7 The high data rates and spectralefficiency achievable through digital transmissionopen up the possibility of delivering high-qualityaudio and video signals over a variety of differentnetwork infrastructures. Transmissiontechnologies such as narrow-band ISDN8, xDSL9

6 MPEG - Motion Picture Experts Group. The family of

standards extends from MPEG-1 to MPEG-4, of whichMPEG-2 (studio-quality television and multiple CD-qualityaudio channels) is the most widely used.

7 That is, the same content delivered to many consumers,but upon their individual request and not necessarily atthe same time.

8 ISDN - Integrated Services Digital Network. Thenarrow-band version was standardised over the last30 years by Telecommunications Operators wishing todigitise the customer access network. Its longgestation period has caused risks of technicalobsolescence which have been mitigated by other

and ATM10 will ensure that both existing and newinfrastructures can play a role in carrying the newservices. The capabilities of existing networksare also enhanced by the compressiontechniques implicit in the MPEG standards,allowing networks of limited transmissioncapacity to carry services previously consideredpossible only on sophisticated and more costlywide-band infrastructures.

ATM is of considerable interest as a multimediatransport technology. It is a high-speed cell-relaytechnology, capable of transportingtelecommunications traffic of differentcharacteristics (voice, data, video) over the samenetwork, and has been designated by the ITU asthe basis for broadband ISDN, the successorgeneration of its narrow-band counterpart.

This continuing competition between differenttechnologies can change the fortunes of oneapproach or another, making it difficult to beprescriptive about tomorrow’s networkarchitectures. This may be a relatively minorproblem given that today’s applications andservices are becoming increasingly independentof the underlying infrastructure which carriesthem.

Internet technology is leading to platformindependence

The most relevant example of such platformindependence is that of the Internet Protocol (IP).IP has developed into the de facto networkprotocol for the Internet, able to route andtransport all the elements of a multimedia service(text, image, motion video and sound). IP is alsoused in Intranet products, providing aninfrastructure for multimedia applications within acompany or other closed user group.

The Internet can best be described as a networkof networks interconnected on an open basisusing IP, usually running over transmission linksleased from telecommunications operators (TOs).It has evolved very rapidly over the past decade

technologies (notably data compression) and theemergence of suitable applications (notably Internetaccess).

9 xDSL - x-Digital Subscriber Loop whereas x refers tothe technology of the moment. These are technologieswhich exploit the existing telecommunications networkcopper-pair cable for high-speed data transmission.ADSL (A for Asymmetric) runs typically at 1.5Mbps inthe downstream direction and HDSL (H for High-speed)at 6Mbps. These are now being superseded by higher-speed technologies.

10 ATM - Asynchronous Transfer Mode, a high-speedswitching technology operating at a basic transportlevel. This contrasts with higher-level applicationprotocols such as IP (Internet Protocol) which may rideon top of transport protocols such as ATM.

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from a largely academic- and government-sponsored network with a backbone capacity of56kbit/s in 1986, increased to 45 Mbit/s in 1993,and to 155Mbit/s in 1996. This huge change inthe capacity of the Internet's infrastructure hasbeen in response to the remarkable growth in thenumber of people using the Internet and the rangeof applications and software tools developed for it.

The open, non-proprietary approach to standardsfor the Internet has made it easy for companies totake advantage of, and build on, the advancesmade by others in the industry. For example,many would argue that the rapid development ofthe capabilities of the World-Wide Web (WWW)has been enhanced by the open approach tobrowser development taken by vendors such asNetscape, Microsoft and Sun. The Internet will befurther enhanced as a vehicle for multimediatransport by the development of several improvedor new protocols which Internet service providersexpect to implement within the next three years.

This brief review of the salient technologicaldevelopments is not meant to be exhaustive, butto illustrate the role of technology as the motor ofchange. Technology is developing constantly; itsapplication to innovative services and the bringingof those services to market promise even furtherdramatic change in the future.

I.3 Current market developments

Significant changes are now being realisedthrough the application of new technology to theindividual sectors, and these are examined inturn. Such changes are not in themselvesevidence of convergence, but as suggestedearlier, the commonality of technology appliedcould provide a basis for that convergence todevelop.

Digital television and digital audiobroadcasting services are changing today’saudiovisual landscape

In the early 1990s it became apparent that digitaltechnology could be efficiently and cost effectivelyused for the delivery of television and audiosignals. Of particular interest was the possibilityof delivering many more channels over the sameinfrastructure (cable TV, satellite transponders,terrestrial spectrum) by using digital compressionrather than existing analogue transmission.

In the television area, building on the work of theDigital Video Broadcasting (DVB) project,11 and

11 The DVB is a body comprising more than 200

organisations from 30 countries in Europe and aroundthe world. It includes broadcasters (both public andprivate), manufacturers (of consumer and professionalequipment), operators (of satellite, cable and terrestrial

against the background of a regulatory frameworkprovided by the Television without FrontiersDirective, the Television Standards Directive andother measures,12 digital TV services haverecently been launched in Europe. Othercountries around the world are also making use ofDVB technology and European standards. Thefirst commercial services started in France inApril 1996. Other digital services rapidly followedand at the time of writing, more than 200 digitalTV channels are targeted at viewers in France,Germany, Spain, Italy, the Benelux and theNordic area. Of the order of one million digitalreceivers are believed to be currently in operationin Europe - figures which could double by the endof 1998.

Although it is early days in the development ofthis market a number of interesting phenomena -which are either new to TV or significantdevelopments of past practice - are appearing asdigital compression is cost-effectively reducingcapacity constraints:

– Programme bouquets and thematicchannels - Broadcasting companies aremarketing their digital services in the form of‘bouquets’ of programme channels. The“bouquet” complements ‘generalist’ TVchannels with thematic channelsconcentrating on news, sports, movies etc.offering viewers greater choice and coverage ofareas of specific interest to them. Alreadyevident in the analogue era, thematic channelsare set to increase in number and to achieveever finer levels of segmentation with digitaltechnology. Such channels will need to seekwider audiences for economic viability, andpan-European operation could be a way ofsecuring them.

– Near Video-on-demand - The availability ofsubstantial transmission capacity atreasonable prices will soon make “near video-on-demand” (NVOD) services possible.

Example: With 60 satellite channels, ten 90-minute films could be broadcast simultaneously,each one starting at 15-minute intervals.

– Pay-per-view - Similarly, it is possible tomarket specific events or movie-showings onan individual subscription basis. Such pay-

networks) and regulators. It has defined a completeset of specifications for digital TV broadcasting overincluding: cable, satellite, terrestrial and microwaveradio distribution systems. These specifications havesince been converted into ETSI standards.

12 The 1989 Television without Frontiers Directive(89/552/EEC) was recently revised and updated asDirective 97/36/EC. The Television Standards Directive(95/47/EC) was adopted in October 1995.

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per-view services have been provided in the UKon analogue channels (for boxingchampionships) and Spain in digital format (forfootball league matches). The greatercapacity of digital television allows thesimultaneous broadcast of several such events(the most obvious case being matches playedin a football league), giving viewers the choiceof access to a particular event on a ‘pay-per-view’ basis.

These phenomena, which constitute a significantdeparture from classic schedule-basedbroadcasting, have the potential to improveconsumer choice. In addition, and because the“digital channel” is inherently more flexible thanan analogue channel, it can deliver other servicesin the form of data, graphics, moving pictures orcombinations of these. Digital television sharesthese characteristics with digital audiobroadcasting, which also offers listeners near CDquality sound. “Multimedia data broadcasting”already provides for the downloading of computerprogrammes including video games, data files anddirect access to the Internet from the TV set ornetwork computer.

Example: Hughes Olivetti Telecom launched theDirecPC satellite Internet access service in 1996. Itconnects some 2000 sites across Europe to theInternet at speeds up to 20 times greater thanconventional modems.

The arrival of digital radio offers excitingpossibilities for the combination of radio andimages, or links to Internet sites marketing CDsor tickets for band being broadcast13.Broadcasters such as CNN and the BBC arestarting to make parts of their broadcast contentavailable on the Internet, extending their normalgeographical reach, whilst a new breed ofwebcasters is emerging to broadcast particularlive events, such as sports coverage, concerts,major events, etc..

Example: Coverage of the recent Irish elections wasavailable to Irish citizens all over the world via awebcast site (www.itv.com)

Other innovations in the broadcasting field includeWidescreen TV using 16:9 format, the technicalpossibility of higher definition pictures.

Telecommunications liberalisation iswidening choice and lowering prices

In less than ten years, the European telecom-munications sector has experienced a radicaltransformation from one characterised by rigidand inefficient monopoly to a sector facing full andvigorous competition, with the total liberalisation 13 Radio with Images, Financial Times, 11 November 1997

of services and infrastructure due to take place inmost Member States from January 1998. Thistransformation owes its beginnings in part to anearlier phase of convergence - that betweentelecommunications and computing - over adecade ago. Technological convergence rapidlygave rise to market convergence, and to “value-added” services - innovative services whichborrowed concepts from both sectors, and whichallowed businesses to extend the power ofcomputing beyond the geographical confines oftheir immediate locations.

The regulatory traditions of the telecommunic-ations sector contrasted sharply with the free-market environment in which the computingindustry had developed, and their coming togethermeant that some rationalisation of these differentregulatory philosophies would be needed if thenew services were to flourish. The 1987 GreenPaper14 concluded that greater harmonisation andgradual market opening in telecommunicationswould provide the most fertile environment forsuch growth. The first measures were initiated in1988 and culminated in the introduction of fullliberalisation of the telecommunications sector by1 January 199815 This step-by-step process oftelecommunications liberalisation and globalmarket opening is already bringing substantialbenefits to many businesses and consumers,with lower prices, improved customer service andinnovative service offerings. Even so, the overalllevel and structure of prices continue to have amajor impact on the take-up of new services.

The mobile communications business isparticularly dynamic.

Example: Close to one in three people inScandinavia have a mobile phone and there aremore than 37 million mobile telephony users inEurope.

Increasingly, such mobile systems are adding amultimedia component. One aspect of marketconvergence occurring within thetelecommunications sector is that between fixedand mobile telephony, as in certain MemberStates and amongst certain groups of thepopulation (e.g. students, small businesses),mobile phones are replacing fixed connections.

However, this practical example of how fixed andmobile networks are converging is only part of a

14 Towards a dynamic European economy, Green Paper

on the development of a common market fortelecommunications services and equipment,COM(87)290, Brussels, 30.06.1987

15 Commission Directive 96/19/EC and the body oflegislation adopted by the European Parliament andCouncil. Certain additional transition periods areprovided for some Member States.

6

wider trend towards the full integration of wiredand wireless technologies, which is the key goalof the next generation of digital mobilecommunications systems. This will offer users aplatform on which to receive a seamless set ofvoice, data, multimedia and audio-visual serviceswherever they are. This vision, which hasimportant implications for all the sectors affectedby convergence was first recognised in the 1994Mobile Green Paper16 and has most recently beenreturned to in the Commission’s twoCommunications on Universal MobileCommunications17.

The Internet is bringing new services tobusiness and the public at large

It is, however, in a third sector, the Internet, thatchanges have been the most radical. The Internetis both the symbolic and prime driver ofconvergence. It is a vehicle for the delivery tousers of both existing services (electronic mail,video, sound, voice telephony, for example) andcompletely new services (e.g. World-wide Web).It has rapidly evolved from a government/academic network to a powerful communicationand trading platform. Characterised by anunprecedented growth rate (doubling its number ofusers every year), the Internet has started toinfluence a number of economic sectors, with theemergence of a fast-growing electronic-commerceeconomy.

The Internet is displacing traditional computernetworks, and showing the first signs of how itmay provide a platform which over time replacestraditional methods of trading. For example,traditional business-to-business trading on closedcorporate networks is giving way tomultidimensional commerce on global opennetworks. The Internet is also providing analternative means of offering the coretelecommunications business activity (even ifdifferences in quality still distinguish the twoservices) through the delivery of Internettelephony, without in some cases either partyneeding to have a computer. The Internet is alsoa significant platform for broadcasting services.

Example: Today, there are 650 Webcast radiostations and 270 “Real-Video” enabled sites on theInternet,18 offering video material of currentEuropean and US broadcasters.

New Internet techniques, such as multicasting,offers the possibility of delivering audio and visual

16 Green Paper on a common approach in the field of

mobile and personal communications in the EuropeanUnion, COM(94) 145 final, 27.4.94

17 COM(97) 217, 29.5.97 and COM(97) 513, 15.10.9718 www.timecast.com cited in OECD report op cit note 5.

content to up to 50,000 users at any one timeinstead of 50,000 individual messages, narrowingthe borderlines between previously separatesectors. Many consider that Internet will becomea major conduit for video and sound (especiallymusic) distribution.

However, the Internet as a platform has developeddifferently from traditional broadcasting andtelecommunications. It has been essentiallyuser-driven, with user-owned equipment (therouters performing central rather than peripheralnetwork functions) and users themselvescontinuing to generate a substantial part of thecontent. The decentralised nature of Internet isseen by many as the single main reason for itssuccess, and as a lesson for the convergingenvironment. A characteristic of the Internetwhich is indicative of convergence is that itfunctions simultaneously as a medium forpublishing and communication. Unlike traditionalmedia, the Internet simultaneously supports avariety of communication modes, bothtransactional and broadcast in nature: one-to-one,one-to-many, many-to-many. An Internet usermay “speak” or “listen” interchangeably,interweaving public communication (the content ofwhich is - at least in the case of broadcastcontent - traditionally regulated) with privatecommunication (traditionally unregulated). Thisconstant shift from publishing to privatecommunication modes, each regulated throughvery different principles, constitutes one of themain challenges of Internet regulation.

Mergers and Alliances are reshaping existingindustries

The on-going process of convergence, theopening up of the telecommunications sector tofull competition both in Europe and globally, andthe rapid growth of the Internet and on-lineservices, is leading to the creation of new marketstructures and new roles for market players. In1996 more than 15% of the total value of world-wide mergers and acquisitions (US $1 trillion) wasgenerated by activity in what can broadly betermed information and communication industries.Such ventures represent a wide-range oftransactions, from horizontal alliances whichshare risk and match complimentary skills, tovertical integration as players in one marketsegment seek to leverage technologicalconvergence, expand into other higher valuesegments or develop scale economies. Onestudy being carried out for the EuropeanCommission interpreted the motivations behindsome the main types of transactions (not allsuccessfully concluded), shown in Tables 1 and 2

7

below.19 Although they do not necessarily reflectthe views of the Commission and cannot beconsidered as an assessment under theCommunity competition rules, they arenonetheless useful illustrative pointers to theevolving market situation.

Table 1: Horizontal Mergers and Alliances

Rationale Examples

Increasing marketpower/gainingminimum efficientscale

Vebacom - UrbanaSystemtechnik, Cable andWireless Communications,Demon - Cityscape

High cost of new(digital) technologies

Canal Plus - Nethold

Uncertain demand fornew services

Multimediabetriebsgesellschaft (Kirch, Bertelsmann, etc.)

Internationalisation BT-MCI, Global One, UUNet -Unipalm Pipex

Opportunities arisingfrom regulatoryreform

MFS/Worldcom, TelenetFlanders, NYNEX/Bell Atlantic

Table 2: Vertical Mergers and Alliances

Rationale Examples

Uncertainty of demand Hughes Olivetti Telecom(DirecPC), @Home

Market positioning andaccess to new skills

Bertelsmann - AOL, BBCWorldWide - ICL, STET - IBM

Gaining control ofchannels to thecustomer

BT - BSkyB, Disney - ABC -Capital Cities

Moving into highermargin areas of thevalue chain

Microsoft Network - NBC(MSNBC Internet newchannel)

Stave off competitionfrom companies inrelated markets

US West - Time Warner,Oracle - Sun - Netscape(Network Computer)

The same Study concludes that two trends canbe identified in such activity. One towardsconsolidation of current activities and the othertowards diversification in response to newopportunities opened up by liberalisation of EUand World markets, and with a view to theopportunities offered by convergence. Verticalmerger activity is seen as more significantindicator of a change in industry structures inresponse to the convergence phenomenon.

Underlying that analysis is the reality that few, ifany of today’s market players will have the skillsor resources to straddle the whole of the valuechain within a converged environment, so that the

19 Study on Adapting the EU Regulatory Framework to the

Developing Multimedia Environment, Squire, Sanders& Dempsey LLP and Analysys Ltd., to be published inDecember 1997.

emergence of major players in the sectorsaffected by convergence will inevitably rely onpartnering to varying degrees. In such a context,the Competition rules will continue to play a keyrole in assessing new ventures as the emerge.

Competition policy: the need to keep marketscompetitive

In the past, the Commission has applied theCommunity competition rules to convergencecases,20 including some of the cases mentionedin the table above. Global One and BT/MCI areexamples of the cases where the Commission,following changes to the arrangements to protectcompetition, has been able to approve under thecompetition rules agreements considered likely topromote technical progress. However, theCommission has taken action against otherarrangements which unduly foreclosed marketsand which were therefore incompatible withCommunity competition rules. Notable amongstthese were the MSG and Nordic SatelliteDistribution operations, where the combination ofmarket players in the converging markets and themarket positions which they were likely to hold inthe future would have led to a foreclosure of themarket on a lasting basis. This would have, inturn, been likely to result into excessive pricingas well as a loss of innovation and productvariety, to the detriment of the fast development ofthese markets in Europe. As this could not beremedied with changes to the arrangements,therefore the agreements were prohibited.

In the future, the Commission will continue tofavour agreements which promote technicalprogress, and which promote market entry. Onthe other hand, the Commission will not allowagreements or mergers which have the effect offoreclosing markets or strengthening or creatingdominant positions, or giving the parties thepossibility of denying access to new entrants.The Commission will also prevent market actorswho enjoy an existing dominant position fromabusing that dominant position, such as it did inthe Microsoft case, or in the case oftelecommunications operators on liberalisedmarkets.

20 For further details, refer to the European Commission’s

Annual Report on Competition for 1994, 1995 and 1996.

8

I.4 Summary and questions

This chapter has attempted to define thephenomenon of convergence betweentelecommunications, media and IT sectors. Itdescribed the enabling technologies ofconvergence and its initial manifestation in thenetwork platforms associated with the on-linedistribution and delivery of services. The chapterconcluded that while there is general agreementon the notion of technological convergence, thereis less certainty regarding the likelihood and/ortiming of a full convergence of the services andmarkets.

Question 1: The nature and impact ofconvergence today

Chapter I highlights the nature of the convergencephenomenon, the technological and marketdevelopments and the underlying political stakesfor Europe.

(A) Whilst convergence is occurring at thetechnology level, to what extent and at whatspeed is this happening at the industry, serviceand market levels?

(B) Are the effects of convergence alreadybeing felt in the business world and in oureveryday lives, and if so, in what way?

Chapter IIThe impact of convergence on therelevant sectors

Following a discussion of the social andeconomic context for convergence, Chapter IIexamines market trends in order to assess thepotential impact of convergence on the relevantsectors. The chapter concludes with a discussionof how consumers may be responding to thesedevelopments.

II.1 The social and economic context

Social aspects

The concept of the Information Society providesthe political background for convergence. TheInformation Society permeates current thinking onfuture economic development and is predicted tohave an equivalent impact on society andemployment as the industrial revolution did acentury before.

Within this context, the new services andactivities made possible through the range oftechnological and market trends identified abovehave the potential to impact every aspect of ourlives, from our homes to our work place; from theway we do business to the way we learn; fromaccess to healthcare to the management anddelivery of public services and to the way citizensparticipate in a democratic society. Today peopleare already using telephone-based services insome Member States in areas such as banking,insurance and ordering of computers or theatretickets. It is only a relatively short step before thedelivery of such services becomes common placeover the television or via a PC. A key issue inthat context is ensuring that users are familiarwith and comfortable using new technologies andservices, whilst as will be seen later theregulatory framework has a role to play inensuring user confidence in the new environment.

A range of Community initiatives have attemptedto give a concrete form to the impact of the socialand societal implications of the InformationSociety following the landmark White Paper in1993,21 and the Bangemann Report published thefollowing year.22 Similar high-profile initiativeswere undertaken at the same time in the USAand other parts of the world, and an internationaldimension was added in 1995 when the G7

21 White Paper on growth, competitiveness, and

employment - The challenges and ways forward intothe 21st century, COM(93) 700, Brussels, 5 December1993

22 Europe and the global information society,Recommendations of the Bangemann Group to theEuropean Council, 26 May 1994

9

countries met in Brussels to devise a globalstrategy for developing towards the Informationsociety.

Community initiatives for the Information Society

Broad social aspects are being addressed by anumber of initiatives in which the Commission isinvolved. These include the Information SocietyForum,23 the High-Level Group of Experts on thesocial aspects of the Information Society,24 theCommission White Paper on Teaching andLearning,25 the Green Paper on Living andWorking in the Information Society26, and areconvened Bangemann Group reviewing progresssince its 1994 report. At an early stage, theCommission recognised the importance ofconvergence for the European audiovisualprogramme industry, a prime vector of social andcultural values.27 Two recent Commissiondocuments, one a Green Paper and the other aCommunication, addressed issues of illegalcontent and content which could be damaging tominors.28 The European Parliament29 and theCouncil30 have been active in this area, and arecently-adopted Communication describes howthe Information Society must transcend a widerange of EU policies.31

The many initiatives now under way in furtheranceof the Information Society are being pulledtogether in a Rolling Action Plan32 whichconstitutes the second phase of the

23 First Annual report of the Information Society Forum to

the European Commission, Networks for people andtheir Communities - June 1996

24 Building the European Information society for us all,Final report of the High Level Experts Group, April 1997.

25 Learning in the Information Society - Action Plan for aEuropean Education Initiative, (96) 471, 2 October1996

26 Green Paper on Living and Working in the InformationSociety: People First, COM(96) 389, 22 July, 1996

27 Green Paper on Strategy Options to Strengthen theEuropean Programme Industries in the context of theAudiovisual Policy of the European Union COM(94)96of 6 April 1994.

28 See Green Paper on the protection of minors andhuman dignity in audiovisual and information services,COM (96) 483, 16.10.97 and Communication on theillegal and Harmful content on the Internet, COM(96)487, 16.10.97.

29 The Herman Report, 19 September 199630 Council Resolution on New political priorities regarding

the information society, of 21 Nov. 96 OJ C386,12.12.96, p.1

31 Commission Communication on The Implications of theInformation Society for European Union PoliciesPreparing the next steps, COM(96)395, 24.07.1996

32 Commission Communication on Europe at the Forefrontof the Global Information Society: Rolling Action Plan,COM(96)607 final, 27.11.1996.

Commission’s response to the BangemannReport. The first phase covered the regulatoryframework, the network, services and contentaspects, and the social and cultural issues.33

The second phase, an outcome of the Corfusummit,34,35 is based on a updated set ofpriorities: the business environment, educationand training, protection of the public interest, andthe international dimension.

Impact on economic and industrialcompetitiveness

The convergence debate which this Green Paperraises, is much more than an academic ortheoretical exercise. The ability of the EuropeanCommunity to use convergence, whilst tailoring itto the European version of an Information Society,will be at the heart of growth, competitiveness andjob creation in the years to come. The danger isthat if Europe fails to take advantage of theopportunities provided by convergence, it could beleft behind as other major trading blocks reap thebenefits of a more positive approach.

The socio-economic and business implications ofthe Information Society are currently beingstudied in different fora at a Community level.36

The impact of the new services resulting fromconvergence will be felt in the economy as awhole as well as in the relevant sectorsthemselves.

The most significant example is the emergingfield of electronic commerce. It includes bothindirect (electronic ordering of tangible goods),and direct (on-line ordering and delivery ofservices) forms. Electronic commerce makes itpossible to trade at low cost across regions andnational frontiers.

A recent Commission Communication pointed tothe potential opportunities provided by ElectronicCommerce for consumers and for businesses inEurope, particularly for SMEs.37 It estimated thatelectronic commerce revenues, both direct andindirect, are set to increase to 200 billion ECU

33 Europe’s way to the information society: An Action Plan

COM (94) 347, 19 July 199434 Communication of the Commission to the Council, the

European Parliament, the Economic and SocialCommittee and the Committee of the Regions. on TheInformation Society: From Corfu to Dublin -The newemerging priorities, COM(96)395, 24 July 1996.

35 Commission Communication “The implications of theinformation society for European Union policies -Preparing the next steps”. COM (96) 395, 24 July 1996

36 See for example, Action Plan for employment inEurope: A confidence pact, CSE/1262/96, OJ C56, 24February 1997 and Cohesion and the InformationSociety, COM(97)7,22 January 1997.

37 Commission Communication, A European Initiative inElectronic Commerce, COM(97)157, April 1997

10

world-wide by the year 2000. It also highlightedthe creation of a favourable regulatory frameworkon both EU and global levels as a prerequisite forfurther development.

With regard to the impact of convergence on itscomponent sectors, one study indicated thatrevenues in the relevant sectors could suffer bysome 40% by the year 2005 if the market doesnot develop in a direction which takes fulladvantage of convergence.38 To give some idea ofscale, Fig. 3 shows that the relevant sectorsrepresented some ECU 1750 billion in 1996, ofwhich ECU 508 billion was attributed to EUmarkets.39

Expansion of the market for services and themeans of their distribution seems likely to have aknock-on effect in content production, thoughoften as a result of regulatory obligations placedon particular broadcasters. There is evidence, forexample, that the success of Canal+ paytelevision in France has had a positive impact onthe French cinema industry. Likewise, in-dependent content producers in the UK weregiven a boost when Channel 4 arrived on thescene.

Future developments may impact on the fulfilmentof the public service mission. First, as the pay-TV market matures, operators may need toincrease their investment in local content tomaintain quality and product differentiation. For

38 See KPMG Report, Public Policy Issues arising from

Telecommunications and Audiovisual Convergence,September 1996

39 Source: Market developments in telecommunicationsand integrated communications services to the year2010, Study by IDATE for the Commission, 12/97

example, British satellite pay-TV operator,BSkyB, is now a major investor in the UK filmindustry, and Canal+ is acquiring rights in Frenchcinema libraries. Secondly, competition inconveyance (terrestrial, cable, satellite, etc.) islikely, particularly in a digital environment, to shiftthe bottleneck from delivery to content, with aresulting hike in the prices for content rights.

Employment effects

The signals this sends to the marketplace shouldlead to greater investment and hence employmentin the content business to satisfy the increasingdemand. Europe is well-placed to meet thischallenge by harnessing its creative capacities tothe diversity of cultural environments under itsroof. However, EU production is not increasingrapidly and the EU therefore needs to strengthenthe competitiveness of its companies so that thepublic can get the most out of the opportunitiesoffered by the new media, and so that marketgrowth can be transformed into jobs to bring thenumber of people employed in the industry inEurope (1.8 million) closer to the level in theUnited States (2.6 million).

Quite apart from the multiplier effects generatedby convergence in its role as an enabler of theInformation Society, there is likely to be a directand positive impact on employment in the relevantsectors. Expansion of the market and theattendant demand for new content and serviceswill generate a need for people with the requisitecreative talents. This will be felt both in largecompanies seeking to reorient themselvestowards the new markets, and in SMEs seekingto exploit niche markets. SMEs will combinetheir use of standardised digital platforms such asthe Internet with software skills to developapplications and services aimed at bothprofessional users and residential consumers.The task will be to take full advantage oftechnological convergence by integrating thediverse components of telecommunications,media and IT sectors to produce innovativeservices.

Staff retraining will be an important requirement,Gearing up for the new markets will need peoplewith the right mix of skills, for which specialisedtraining will be required. The Commission haslaunched a number of initiatives in the field ofeducation and training, notably the action plan,Teaching and Learning in the InformationSociety,40 as well as certain activities in thecontext of the Leonardo (training) and Socrates(education) programmes.

40 Op.cit Note 25

Fig.3: 1996 distribution of global revenues (ECU1750 billion) for the relevant sectors

ElectronicInformationServices

2% Publishing19%

ConsumerElectronics

9%TelecomsServices

26%

TelecomsEquipment

9%

ComputerHardware

12%ComputingServices

15% AudiovisualServices

8%

(Source IDATE)

11

Research and Development

European support for co-operative research anddevelopment activity, through the ACTS(Advanced Communications Technologies andServices), Esprit and Telematics programmes,has played an important part in many of thetechnical developments which has made theconvergence phenomenon possible. It hascontributed to the strength of European IT,telecommunications and software industries.Much of this work has supported the developmentof technical standards subsequently adopted bythe industry and formalised by Europeanstandardisation bodies, and has contributed tothe development of technical platforms and toolssupporting electronic commerce.

Research and Technological Development (RTD)Programme activities during the FourthFramework Programme have equally encouragedgreater participation by SMEs, who can benefit,for example, from systems and services whichstimulate tele-working. A specific example of anintegrated approach to systems and services ofbenefit to SMEs is the Integrated Applications forDigital Sites.41 Here, on-line and off-linemultimedia applications supply integratedservices from central/local government - intransport management, tele-medicine, educationand training - to local citizens, businesses andother organisations in a cost-effective, user-friendly manner.

Following the adoption of the proposal for the FifthFramework Programme in April 1997, theCommission has reviewed research activities inIT, telecommunications and telematics with aview to grouping them into a single integratedprogramme. In the context of convergence, thisincludes R&D activity in the area of multimediaand audiovisual content.42

II.2 Market Trends

This section looks at market trends withouthowever providing an assessment under theCommunity competition rules. The activities andinvestment strategies of market players in

41 Subject of a Call for proposals in 1997 under the

Telematics Applications Programme. Digital sites arephysical sites in geographical areas such rural areas,small towns, cities or regions, in which local needs ofcitizens and businesses can be met through IT andtelecommunications multimedia applications.

42 See COM(97)553final of 5.11.97, Fifth FrameworkProgramme, Research and TechnologicalDevelopment (1998-2002), Commission WorkingPaper on the Specific Programmes: Starting points fordiscussion.

response to new developments are now becomingevident, and give a good indication of how thoseplayers perceive future trends. One indicator ofconvergence is the willingness of market playersto exploit the possibilities provided by newplatforms, in particularly, the Internet to expandtheir activities beyond the confines of theirtraditional core markets in both a geographicaland product sense. Webcasting highlighted aboveis one such example. The entry of telecomsoperators into the area of Internet serviceprovision and Internet voice telephony provision isarguably another. Such services are new only inthe sense that they represent an excursion intonew areas for the provider in question. But someare new to all-comers.

New services

The flexibility of digital information is creating thepossibility for more and enriched conventionalservices, (such as digital television and radio andbetter quality mobile communications), as well asa whole range of new services and applications.These new services are as varied as electronicnewspapers. on-line supermarkets andcatalogues, home-banking, and the use ofmultimedia web sites for both internalcommunications, and as a key tool for business.

Examples:

• Broadcasters who are branching into new areas,such as data broadcast, Internet webcasting andtelecommunications transport and services;

• Telecommunications operators who areproviding audiovisual services, such as video-on-demand and cable television.

• Internet service providers who are starting todistribute audiovisual material, and Internetaccess providers supplying voice telephonycapability.

Despite current limitations a number ofapplications are closing the gap between smarttelevision and video Internet. The area wherethese two areas converge currently constitutesthe most fertile ground for innovation andentrepreneurial activity – as well as for creation ofentirely new types of content. Innovative forms ofgraphic-rich “Internet channels” are building on thecreativity of previously separate métiers of videoproduction, computer imaging and informationmanagement. Similarly, high-end networkedvideo-games are building devoted constituenciesof players across national borders. In a seamlessand scaleable digital environment, innovativehybrid multimedia applications are appearing −such as digital television ‘infomercials’ withInternet response mechanisms (for immediateordering), CD-ROM catalogues with Internet

12

connections (for content or price updates) andcommercial Web sites with local CD-ROMextensions (for memory-intensive multimediademonstrations).

At the delivery end of the value chain, players aremoving into what are for them new areas ofactivity. New features are being added toservices on all networks. In addition, the servicesthemselves are changing by combining thefeatures of hitherto separate services. Thustelevision programmes are ‘data-enhanced’ by theparallel availability of text and graphics. One pilotproject, for example, supplements broadcasts ofhorse-races with supporting text and facilities foron-line betting. The same possibilities are offeredby digital radio.

New players

As convergence enables incumbent players in thetelecommunications broadcasting sectors toexpand their roles, it also marks the entry ofpowerful new players from publishing and IT

industries. For information providers, such aspublishers, database operators and financialinformation services, the Internet constitutes acrucial extension of their traditional know-how,and an ideal means of recycling and “repurposing”rich stores of information.

Similarly, IT companies are exercising significantinfluence on shaping the new services market inEurope − as they move towards generalised on-line distribution of software and multimediacontent, make substantial investments into cableand television business, and act as integrators ofadvanced television trials in Europe. Underpinnedby the exponential growth of computing power,kept responsive to change by shortened productlife-cycles, used to operating in a fiercelycompetitive environment, and historicallyunhampered by cumbersome regulation, thecontribution and potential of the IT industry to firstdrive and then benefit from convergence shouldnot be underestimated.

____________________________________________________________________________________________

Fig.4: Locations of the Major Players in the Value Chain and Relationships between them

TO BroadcasterElectronic publisher

Internet service provider

Content creator

Software developer

Content creation

Packaging

Service Provision

Infrastructure provision

Terminal vending

Core strength

Partial competence Potential contractual link to another player

Exist ing relat ionship or contractual l ink

(Source: Squires, Sanders Dempsey LLP and Analysys Ltd.)_________________________________________________________________________________________________________

New market structures

The significant merger, acquisition and alliance(M&A) activity described in Chapter I aremotivated by a range of commercial and strategicfactors. The trend towards convergence would beone of these, albeit an important one. Someargue that new market structures reflect asubstantial shift in the value chain, with valuemigrating from simple delivery to the productionand packaging of content or the offer of on-line of

services and transactions. Liberalisation andcompetition, coupled with digitisation andsignificant increases in network capacity of bothbroadcasting and telecommunications networks,is rendering the transmission and delivery ofservices a commodity item, converting it into alow-margin high-volume business. Firmscurrently operating in the lower parts of the valuechain are therefore seeking to increase volume ontheir core activity, through horizontal alliances ororganic growth into new geographical markets.

13

At the same time, they are moving up the valuechain to higher margin activities through verticalconcentration. Telefónica’s purchase of Antena3TV in Spain, the STET group’s creation of Streamin Italy and Microsoft’s acquisition of cabletelevision operator Comcast in the USA are allexamples of companies moving across sectorsas much for strategic as for commercial, profit-motivated reasons. Fig.4 maps out thesestrategies by type of market player and byelement of the value chain brought into play. Italso indicates the types of commercialrelationship which are emerging between differentactors. It should be noted, however, that therepresentation is schematic and, that neatdistinctions between content creation, packagingand service provision are sometimes difficult toestablish.

The situation is reinforced by the emergence ofnew industries filling in the gaps betweenadjacent sectors; some of the start-up companiespioneering on-line computer networking services adecade ago have grown into multi-billion dollargroups today. CompuServe and American On-line are two cases in point. The recent linking ofthose two businesses together with Worldcom isa further example of the fluidity of current marketstructures .

II.3 The consumer perspective

The nature and potential growth of marketdemand for the new services is the greatestuncertainty facing market players. The signalsfrom the marketplace are conflicting. Supply-sideindicators, in terms of M&A activity andinvestment in new service development, give apositive impression of market potential. On theother hand, although growth rates in Internetservices are impressive, only around 8% ofEuropean citizens are using the Internet at work,and around 4% at home. This represents asmall proportion of the total consumption ofaudiovisual material, in which TV set penetrationexceeds that of the telephone. Moreover, manyview the passive consumption of family televisionviewing to be the mainstay of audiovisualconsumption for the foreseeable future.43

However, there are some indications of potentialchange in the patterns of consumption of servicesand in the home environment. Some of these aretaken from market developments in NorthAmerica, where the use of PCs in homes iscurrently much greater than in Europe. Parallelsdrawn from the US market will only be valid 43 See Economic Implications of New Communication

Technologies on the audio visual markets, Studycarried out for the European Commission by Norcontel(Ireland) Ltd., March 1997.

therefore to the extent that a similar level of PCuse can be achieved in Europe.

The changing patterns of consumption

Consumers are likely to use new products andservices offered through convergence only insofaras those services are useful to them. The take-offof new services cannot therefore be simplysupply-driven, but must take account of demandand, in particular the consumer viewpoint. This isreflected in consumption trends which arebeginning to show the first signs of a convergencein the home:

– in 1998, for the first time more personalcomputers will be sold in the world thantelevision sets; this must of course be setagainst the very high penetration of TVs in thehome, and the fact that PCs are sold to bothbusinesses and homes;

– in 1995, Americans spent less than half of allscreen-viewing time in front of computers;recent US audience measurements indicatethat Web users already consume 59% lesstelevision than average viewers and it isestimated that the TV set’s share of screentime will be half that of the personal computerin 2005; on the other hand, audience figuresfor 1995/96 show that the average dailyviewing time in Europe increased by 4minutes, compared to a decrease of 2 minutesin the US;

– research into activities displaced by increasedpersonal computer usage shows that watchingtelevision loses out rather than reading booksand magazines, or playing console videogames. According to Price Waterhouse,young adults in the US between 18 and 35who used to spend 4 hours a day watching TVnow spend one of those hours ‘surfing the net’.

In terms of available leisure time and expenditure,the youth segments are already opting forinteractivity. Video games alone represent nearly20% of under sixteen year olds’ total mediaconsumption in some markets, according toArthur Andersen.44

Changing home environment forconsumption

A key factor in the take up of new services will bethe penetration of PCs in the home, andparticularly multimedia and Internet capable PCs.Here whilst PC penetration levels of up to 30%are common in most Member States, penetrationof multimedia PCs is considerably lower andInternet usage in the home as mentioned above is

44 “He who hesitates has no audience”, Jolyon Barker,

Broadcast, 10 May 1996

14

growing steadily but from a low base. On theother hand, the current average life of a PC isthree years suggesting the current stock of PCswill become multimedia capable fairly quickly,whilst increasing familiarity with thesetechnologies at work and in schools will help toboost home take up further.

One major change in the home has been thetransition from collective, family viewing of two orthree generalist TV channels to individual familymembers viewing alone, selecting from the muchbroader range of channels on offer in today’smulti-channel environment. The multi-channelbroadcast environment itself competes withpackaged media, played on video recorders andvideo-game consoles. All of this will increasinglycompete with the computer, particularly with itsuse on line.

Aware of the changing patterns of consumption,the television and computing industries are vyingfor viewers’ attention. Broadcasters and TVmanufacturers are enhancing the interactivecapabilities of their services and equipment.Today’s digital television set-top boxes alreadycombine television and telecommunicationfunctionality. TV sets can already double asmonitors when connected to low cost Internetappliances. Many in the consumer electronicsindustry predict that TV sets with built-in PCcapability, including Internet access, will becomean important feature of the consumer market inthe near term.

From the other end of the spectrum, the computerindustry is already offering multimedia PCs whichallow viewing of television channels. HybridWebTV set-top boxes combine Internet anddigital TV reception with facilities allowing storageand manipulation of video content, enablingapplications as diverse as downloading of filmsand sending of video-clips as E-mail.

Whether the PC/TV or the TV/PC will win thisbattle is, at the moment, quite unclear. What iscertain however is that the consumer’s “homeplatform” is set for significant evolution over thenext few years. Yet at the same time and inparallel, consumer demands and needs for betteraccess to information will also allow forconvergence of those telecommunications, mediaand information technology products andservices that cater to public interest domainssuch as education, health, environment andtransport.

II.4 Summary and questions

This chapter discussed the overall political andeconomic context for convergence, placing itagainst the background of the Information

Society, and describing the range of Community-level activity in this area.

It then went on to discuss market trends fromboth supply and demand perspectives,punctuating optimistic views on the futurerealisation of convergence with a realistic view oftoday’s patterns of consumption, and the relativestarting points of different platforms such as theInternet and free-to-air broadcasting.

Question 2: The socio-economic, businessand consumer impact of convergence

Chapter II highlights the potential for convergenceto have a significant impact on society, onemployment, growth and competitiveness ofbusinesses in Europe, and on the way we accessa range of services, information, entertainmentand culture.

(A) Will convergence have a significantimpact on job creation, as well as on educationand training in the European Union? How isconvergence likely to impact the way in which wework? Will its effects be spread evenlythroughout the European Community?

(B) What effect are current developmentslikely to have on telecommunications, media andIT sectors, in terms of the underlying economicsof those sectors, the services offered and thelikely service providers?

(C) What evidence is there of changes inEurope in the way services, information,entertainment and culture is being accessed inthe home and in the office? What are theimplications of current levels of PC penetration,Internet use and TV penetration for the take up ofnew services? What action (if any) is needed toovercome low levels of multimedia computerpenetration and Internet use?

(D) In the light of the positions put forward inthe Commission Working Paper on the FifthFramework Programme,45 what kinds ofCommunity RTD projects should be launched inthe context of convergence?

45 Op. Cit. Note 42

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Chapter IIIBarriers to convergence

Convergence is already showing signs of being akey driver of current developments intelecommunications, media and informationtechnology industries. The range of developmentsand trends for comment identified in Chapters Iand II above have the potential to impactsubstantially on the take off of the informationsociety in Europe.

In order to formulate an appropriate response tocurrent developments, it is important to launch abroad debate on what, if any, barriers exist -actual or potential - which may hold back thetrend towards convergence.

Chapter III attempts to identify such barriers andinvites comments on their impact. Not all thebarriers identified are regulatory in nature, nor is aregulatory solution the only means of resolvingpotential problems. Nevertheless, it seemssensible in the overall context of this Paper toinvite reflections on a wide range of factors whichmight impact upon the process of convergence.

Where regulatory barriers are identified therefore,there should not be an automatic assumption thata regulatory response is required. As statedearlier, the application of competition rules to thissector is important, and market solutions whichremove barriers to convergence within the contextof those solutions will often be more appropriate.

At a Community level, actual or potential barriersmust be assessed against the basic objectives ofthe Treaty, such as the establishment andfunctioning of an Internal Market; the promotion ofa system of undistorted competition; therealisation of trans-European networks, or themaintenance of a high standard of consumerprotection. They must also be examined as wellas against the specific freedoms envisaged in theTreaty, such as the rules relating to the freedomto provide services or the right of establishment.

Rules creating restrictions need to follow ageneral public interest objective (as laid down inthe EC Treaty or by the ECJ) and must beproportionate to that objective to be acceptable.At the same time, any Community action(including action to harmonise divergent nationalrules), would pursue these general public interestobjectives, and would be subject to the principleof subsidiarity.

III.1 Existing barriers

In the following sections, we attempt to identifykey actual and potential barriers to thedevelopment of the convergence phenomenon and

ultimately to the realisation of the InformationSociety in Europe.

Access to users. Approaches differ betweensectors with regard to the ownership andoperation of networks. This means that manyservices will have a limited choice of routes to thecustomer. Even where legal monopolies havebeen abolished, the economics of the local loopmay leave current telecommunications and cableTV network owners with a predominant role inconnecting customers in many markets. Wherebottleneck facilities are controlled by vertically-integrated players, there is the potential to limitcompetition at the service level.

Regulatory restrictions on use ofinfrastructure. Current restrictions in someMember States (and not others) regarding whattypes of services can be carried on differentinfrastructures could make it difficult for operatorsto formulate unified strategies addressing pan-European markets. It may also preventeconomies of scale being realised. The resultinghigher unit costs, and hence tariffs, could holdback the delivery of innovative services.

Prices for telecommunications services. Highprices for telecommunication services and for theunderlying network infrastructure used to deliverservices may impact significantly on the demandfor services. Among the reported reasons forInternet’s success in North America is thewidespread application of a flat-rate tariff structureoffering ‘free’ local telephone calls, and the factthat competition has led to lower charges forleased network capacity. 46 This results insignificantly lower costs for access providers.

Availability of content. As mooted in SectionII.1, expansion in the means of delivery broughton by improvements in technology and byconvergence may shift the bottleneck fromdelivery to content, and may lead to a shortage ofadequate content in the medium term. Premiumcontent is already a key factor for success inboth digital and analogue television markets,Continued shortages could inhibit new marketentry, and with it competition and innovation.

Fragmentation of EU market. Expansion in thenumber of broadcast television channels will belikely to be at the expense of the market sharesof existing broadcasters. Shrinking marketshares could be offset by widening the targetaudience beyond national frontiers. Similarly, asnew services develop, much innovation will comefrom small players exploiting niche markets, orfrom large players funding large R&D budgets. 46 According to a 1997 OECD report, 20 hours of Internet

use cost $38 in Finland, $64 in the UK, and $74 inGermany, compared to $29 in the US.

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Either way, they will both need larger volumesthan can be provided by national markets in orderto defray their costs. Whilst TV channels are freeto seek larger audiences as a consequence of theTelevision without Frontiers Directive, the principlechallenge for them may be one of multilingual,multi-cultural audiences, rather than potentialbarriers to establishment in countries in whichthey wish to establish a commercial presence.

Insufficient IPR protection. Content providerswill only be willing to make content available iftheir intellectual property rights are sufficientlyprotected. Similarly, publishers and operators willonly invest in innovative services if they areconfident that new means of delivering informationand/or services provides an adequate degree ofprotection for the intellectual and industrial effortof their organisations and those of contentproviders. Insufficient protection is already abarrier for off-line electronic content, and thiscould project into the on-line world. RecentWIPO agreements referred to later in the Paperare helping to clarify the current situation.

In view of advanced state of current Communityinitiatives which adapt the existing legalframework in this area to the digital environment,this Green Paper does not address regulatoryissues raised by copyright and related rights.These particular issues have been extensivelydealt with in the Green Paper on Copyright andRelated Rights in the Information Society and inits follow up Communication,47 and the resultingapproach takes due account of the evolution oftechnologies towards convergence.

III.2 Potential barriers

Regulatory uncertainty Regulatory uncertaintyresulting from the scope of current definitions; theway they are applied or whether they fit changingmarket structures or service characteristics couldconstitute an important barrier to investment bymarket players. Whilst many definitions today (atboth a national and Community level), such asthose of telecommunications, voice telephony,television broadcasting or information societyservices will continue to remain valid for manyactivities, the provision of services may benevertheless be held back where those definitionsleave businesses uncertain as to the regulatorytreatment which their services will receive.

In some cases, this may simply be a risk that,notwithstanding current definitions at aCommunity level for both broadcasting andtelecommunications activities, regulators in someMember States may place a particular novel 47 COM(95) 383 19.7.95 and COM(96) 568, 20.11.96,

respectively.

service under one regulatory regime, whilst it isconsidered to fall under another regime in otherMember States.48

Furthermore, within Member States barriers couldresult if similar services were regulated differently,for example on the basis of the platform overwhich they are delivered.

In other cases, the characteristics of services inthe future may mean that they straddle more thanone regulatory area on the basis of currentdefinitions. This may result in a disproportionateregulatory burden on certain services.

Finally, the technological and market trendsidentified in Chapters I and II may also challengethe basis on which definitions are currently drawnup.

One example of regulatory uncertainty aroseduring the recent French election campaign,where rules prohibiting the publication of opinionpolls in the week prior to the election applied tooff-line media, but not to polls published on theInternet. A number of editors in thesecircumstances ignored the ban which placedtraditional media at a disadvantage49.

Multiple regulatory bodies. The process ofobtaining regulatory clearance in all MemberStates and potentially from different regulatorybodies for a particular package of services maycreate substantial overheads for those wanting tooperate on a pan-European basis. The provisionof services may be held back where marketplayers are subject to a number of regulatoryregimes or must deal with multiple regulatorybodies, for example, where a network is requiredto be licensed both as telecommunicationsinfrastructure and as a broadcasting network(because it is used to offer both services).

Market entry and licensing. There aredifferences within the telecommunications, mediaand IT sectors with regard to whether or notmarket entry is unrestricted, limited or subject tomonopoly or special rights. The IT sector isgenerally free of licensing procedures.

Any use of licensing or any regulatory limitationon market entry represents a potential barrier tothe provision of services, to investment and to faircompetition and should therefore be limited to

48 One example is Video-on-Demand which according to

the Squire Sanders Dempsey Study is consideredeither treated as a value-added telecommunicationsservice or has not yet been formally categorised in allMember States, except France and the UK, where itfalls under the broadcasting framework and Germany,where it falls within the new category of“teleservices”.

49 OECD op cit note 5

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justified cases. In particular, the trend should betowards limiting regulation where potential barriersexist, rather than extending heavier regulation tomore lightly regulated sectors in order to equalisemarket conditions.

Where licensing continues to be important, thereis considerable variation between sectors andbetween Member States in the length of time ittakes to obtain licences; the transparency ofprocedures; the duration of licences and the feespaid. Many telecommunications and broadcastnetwork licences are national in scope, but others- particularly for cable TV delivery are regional orlocal in scope. All of these factors, whilstacceptable in the context of the specific sectors,may make it harder or more expensive fororganisations to offer an integrated package ofservices, particularly across borders. This mayrepresent a disproportionate burden given that thetechnology promotes such integration and thereis likely to be increasing demand from bothbusiness users and consumers for suchintegration.

Access to networks, conditional accesssystems and content. The issue of access isprincipally a matter for commercial negotiation,subject to the overall safeguards provided bycompetition rules. Nevertheless, there iscurrently an asymmetry in that access rules arein place only for certain networks (for example,the interconnection and open network rules whichapply to telecommunications networks, but not toinfrastructure used for broadcasting activities.Similarly, a framework exists for conditionalaccess systems for digital television, but not forall types of digital services. (Note that in thelatter case, the UK is currently consulting on thedevelopment of common framework for conditionalaccess systems for all digital services).

Where market players control the access to thecustomers, for example, through ownership of thelocal loop, or through control of conditionalaccess technologies, the company concernedmay be able to discriminate in favour of its ownservices.

With regard to access issues linked to content,normal commercial principles generally apply,tempered only by applicable competition rules.One exception to this is the treatment of certain“premium” content in Member States, such asnational sporting events where the revision to theTelevision without Frontiers Directive has providedfor the mutual recognition across the Communityof events reserved by Member States for free-to-air television broadcasting.

Allocation of radio frequency and otherresources. The provision of services (and thedevelopment of effective competition) will depend

on the availability of sufficient network capacity,which for many services means access to radiospectrum. The parallel expansion of televisionbroadcasting, mobile multimedia and voiceapplications, and the use of wireless technologieswithin fixed networks will lead to a significantgrowth in demand. Where there are markeddifferences in the amount of spectrum available orthe way in which it is allocated, potential barriersare likely to arise, impacting the underlying cost-bases of network operation in the differentsectors, potentially encouraging competitive entryinto one sector rather than another.

Varying approaches to the achievement ofpublic interest objectives. The regulatoryframeworks for each of the sectors affected byconvergence contain a variety of measuresseeking to ensure particular public interestobjectives which are specific to those sectors andwhich are consistent with Community objectives.Indeed the Commission attaches greatimportance to the delivery of general interestservices50 in particular, in ensuring social andregional cohesion in the Community, whilst in thetelecommunications area, the steps taken toensure universal service at a national level nowflow from a framework established at aCommunity level. Nevertheless, the manner inwhich such objectives are pursued (rather thanthe objectives themselves) may represent apotential burden to the organisations subject toobligations in respect of their implementation.. Inthe context of the cross-border provision ofservices, tensions between differing approachesbetween sectors and between Member States,could deter such service provision or investmentin innovative services or networks.

Public confidence in new environment. Wherethe level of protection relating to consumerprotection, the legal treatment of electronictransactions, or data protection and privacy varyacross sectors, users and consumers may lackconfidence in the services and systems madeavailable, holding back the development ofconverged services.

Lack of standards supporting interoperabilityand interconnection of converging networks.The goal of ensuring that any user cancommunicate with any other user will be heldback where market action is unable to deliverproducts and services which are interoperable.Proprietary standards controlled by dominantplayers could limit such interoperability.

III.3 Question

50 See COM(96)443

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Question 3: Barriers to convergence

Chapter III highlights both actual and potentialbarriers to convergence.

What is the likely impact of the barriers identifiedand are there other barriers or factors which mayhave a significant impact on the convergenceprocess in Europe?

Chapter IVRegulatory Implications

In examining the impact of barriers identifiedabove, Chapter IV considers first whether certainfeatures of the convergence phenomenon createnew and specific challenges for regulation.

Section IV.2 identifies possible approachestowards key regulatory. Section IV.3 looks atmeeting public interest objectives and SectionIV.4 examines options for a possible futureregulatory model. The chapter concludes with anoverview of relevant international issues.

IV.1 Challenges to existing regulatory approaches

Areas where the convergence phenomenon couldraise difficulties for existing regulatory approachesare identified below. These challenges apply bothto the substance of regulation and to its practicalimplementation. Possible solutions to theseissues are discussed in Sections IV.3 to IV.5.

The role of regulation

Regulation is not an end in itself. Instead, it issimply a tool, alongside the use of market forces,for achieving wider social, economic and generalpolicy objectives, such as those highlighted inChapter II. This has already been recognised inthe Commission’s Communication on electroniccommerce, which proposed the principle of “noregulation for regulation’s sake”.51 This principleapplies equally to all areas of convergence. Thefundamental objectives underpinning regulation inthe Member States are not undermined byconvergence. These objectives are varied andtailored to the specific needs of different sectors,but include national goals such as promotingefficiency, economic welfare, and the public andconsumer interest. At a Community level, similaraims are reflected in the provisions and objectivesof the EC Treaty.

Nevertheless, the nature and characteristics ofconvergence which are examined below, as wellas the perceived need of industry actors forregulatory intervention to be limited and closelytargeted, should lead public authorities at both anational and a European level to re-examine therole and weight of regulation in a convergingmarketplace. Three key issues can behighlighted:

51 Op.cit. The three other principles set out in that

Communication are also important in the context ofconvergence. These were that any regulation must bebased on Single Market freedoms; must take account ofbusiness realities; and, must meet general interestobjectives effectively and efficiently.

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• The role of market forces. Somecommentators place particular stress on theneed to place greater reliance on the ability ofmarket forces to ensure regulatory objectives.They would argue that this philosophy isreflected in the evolving approach in mostMember States to universal service intelecommunications, or in the IT andbroadcasting worlds by the industry-leddevelopment of interoperable standards andsoftware. Others are doubtful about the abilityof market forces to provide adequate ex anteguarantees for consumers, and recognise animportant role for regulation in safeguardingpublic interest objectives.

• The balance between sector-specificregulation and competition rules. A furtherkey issue is the balance between competitionrules and sector-specific regulation, with manyarguing for a preference to be given to theapplication of competition rules to individualcases within a converged environment, ratherthan the further development of extensiveregulation.

• Finding workable solutions. Where regulationis in place it must apply in a workable andtimely manner. The global nature of theInternet or the regional nature of satellite-delivered services point to the potentialdifficulties of enforcing the rules of oneMember State in other countries; whilst therapid pace of change in terms of services andproducts, measured in months and weeks,presents a real challenge for anyone seeking alegislative solution to any particular problem.Such solutions at a Community level tend tobe measured in months and years.

The challenge to the consistency ofregulation

A key feature of a converged environment is thepossibility that any network can be used to delivera much wider range of services than is currentlythe case. It does not automatically follow that thedelivery of different services over a single networkor via a single service platform makes thoseservices the same, nor that the public interestobjectives underpinning regulation automaticallytranspose from one service to another.

For example, whilst a film, a song, a railwaytimetable and a phone conversation may all becarried in a digital form, this does not result in theuser treating these different services/ activities asinterchangeable. In the same way, regulatoryapproaches to each of these services, whilstpotentially based on similar general principles,are likely to continue to be tailored to the specificcharacteristics of these different services.

Nevertheless, as stated in chapter III, regulatingessentially similar services differently,particularly, on the basis of the technology usedto deliver the service, could representdiscriminatory treatment which might hold backcompetition, investment and the provision ofservices. One example of the treatment ofopinion polls under French election law wasalready cited. Another example could be thelimited scope of the current Interconnectionregime in telecommunications which would offerinterconnection rights to an organisation operatinga public telecommunications network, but not tosomeone operating a broadcasting network.Interconnection between the two may be ofparticular importance in the context of serviceswhich use broadcast media to downloadinformation and services, but rely on the telecomsnetwork to provide a return channel.

In assessing such differences in regulatorytreatment both across sectors and betweenMember States, any analysis at a Communitylevel would need to consider whether continuingdifferences were consistent with public interestobjectives identified in the Treaty and by the Courtof Justice and whether the rules in place wereproportionate to the objective sought. Where theanswer to either question is no, the rules inquestion could be attacked before the Court ofJustice.

Where the barriers resulted from measures whichare fully consistent with the Treaty and whereprinciples of mutual recognition could not beapplied, Community measures (such asharmonising legislation) might be then justified.

The challenge of globalisation

The globalisation of services is a feature of thenew landscape. While satellite television broad-casting represents one example, it is the Internetwhich constitutes the quintessential globalnetwork. The Internet’s structure and ubiquitypotentially allow it to defy attempts to applyexisting regulatory objectives at national level.

In the new global environment, the way in whichnetworks and services are regulated in differentregions has the potential to impact substantiallyon investment in those regions. Excessive orinadequate regulation in one region could result ina migration of economic activity elsewhere, withadverse consequences on the development of theInformation Society in the former region.

The challenge of abundance to regulationbased on scarcity

Convergence may challenge current regulatoryapproaches, particularly, with regard to thelicensing of networks and allocation of resources,

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where such approaches reflect a perceivedscarcity of both radio-frequency and of content.

Current market technological trends, such assubstantial increases in network capacity; thepossibility of content and services to be deliveredover a number of platforms; the increase incompeting routes to customers andimprovements in digital compression suggest thatin a fully digital environment, scarcity may overtime become a less significant issue, calling forcurrent regulatory approaches to be reassessed.

Nevertheless, the removal of scarcity in thetransmission network will not necessarily beaccompanied by a corresponding increase incontent or services (in particular, “premium”content or services needed to fill those channels.)In any event, pending the complete migration ofthe broadcasting sector from analogue to digitalservices, capacity bottlenecks are likely tocontinue for the foreseeable future.

The challenge to distinctions between publicand private activities

Convergence will not prevent the implementationof regulation based on distinctions between whatis private or public, but it may shift the boundariesof where lines between the two can be drawn.This could have consequences for the level ofregulation applied to a particular service. To theextent that rules have been formulated on thebasis that particular networks, services oractivities are public rather than private,52 areassessment may be required to determinewhether current boundaries between what ispublic and what is private remain valid in the lightof technological developments. For example, newmeans of delivering services, interactivity, and thepossibility of per-transaction payments may makeit harder to draw those lines in the future.

Another practical example, is reflected in the tworecent WIPO treaties which relate, inter alia, tocopyright. These have clarified that a “publiccommunication” for the purposes of copyright lawincludes the situation where a work is madeavailable to the public (for example, via a website) in an interactive way.

52 One example in telecommunications, is that whilst public

telecommunications networks may be subject toconditions relating to both public interest objectives andto technical requirements, private telecommunicationsnetworks may only be subject to technicalrequirements. In broadcasting, the definitions ofbroadcasting in a number of Member States specificallyinclude the element of delivery to the public tocategorise services falling within the broadcastingregime.

The challenge to regulatory structures

The fragmentation, complexity and diversity ofregulatory structures involved in the convergingsectors was one of the issues highlighted inSection III.2 above. To the extent that a risk ofoverlapping regulation exists or the need to dealwith multiple regulators within or between MemberStates, market players may call for arationalisation of current structures in order toavoid unnecessary administration creatingbarriers. For example, where services can beoffered over a single network, organisations maybenefit from dealing with a single regulatoryauthority in a Member State on questions linkedto that network, irrespective of the services offeredover the network.

Question 4: The impact of convergence oncurrent regulation

Chapter IV.1 examines the challenges whichcurrent developments pose to the balancebetween regulation, competition rules andreliance on market forces. It also considers howthe convergence process may impact on theprinciples underpinning current regulation in thetelecommunications, media and IT sectors.

(A) Do current developments require more orless regulation in the sectors affected byconvergence, more or less reliance oncompetition rules, and more or less reliance onmarket forces to achieve the objectives identifiedin earlier Chapters?

(B) Whether and if so, to what extentconvergence challenges the principlesunderpinning existing regulatory approaches inthe telecommunications, media and IT sectors?

IV.2 Tackling the barriers - The regulatoryissues

This section examines seven broad areas wherepotential regulatory barriers have been identified:

• Definitions

• Market entry and Licensing

• Access to networks, to conditional accesssystems and to content

• Access to frequency spectrum

• Standards

• Pricing

• Individual consumer interests

The section does not address a number of issueswhich are currently the object of separateinitiatives within the Commission. These include

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areas such as media ownership, digitalsignatures, and encryption, and as mentionedabove, intellectual property rights, copyright andrelated rights.

IV.2.1 A need for new definitions?

Current definitions delimit the boundaries betweendifferent sectoral regulation and differentregulators. Regulation is linked to the definitionsof activities. Although regulation can be“technology neutral”, as in the broadcastingsector (and increasingly in the telecoms sector) itmay be linked to the technology used to offerservices, as well as between areas which areregulated and those which are largely free fromdetailed rules.

The convergence process will not remove theneed for definitions, but uncertainty about theregulations applicable to activities or differentdefinitions at national level could create barriers toinvestment or to the provision of services. At thesame time, it should be noted that the fact thatdifferent services can be delivered over the samenetwork does not in itself alter the character ofthe services so that they become one and thesame service.

In the light of the potential barriers identifiedabove, current approaches to regulatorydefinitions (and the way in which those definitionsare applied by regulatory authorities) should beexamined to consider whether they:

• are sustainable in the light of technologicaldevelopments;

• result in the same service falling under a morethan one regulatory regime, and where it does,whether that is justified.

• lead to discrimination by allowing similarnetworks or services to be regulateddifferently.

A number of Member States have provideddefinitions for certain new activities. In Germany,new concepts of “teleservices” and “mediaservices” have been created, focused on thenature of the activity rather than the underlyingtechnology. Audiovisual law in France has alsofocused on the nature of the service rather thanits underlying platform.

Possible options

One option would be to continue to work withexisting definitions, recognising that these remainvalid for the majority of services offered and toextend, where appropriate, the principlesunderpinning current regulation, whilst adaptingthe way in which it is applied to take account ofthe specific characteristics of the “new” services.

A second option might be the creation of aseparate category of “new” services to co-existwith existing definitions.

A third option would be the adaptation of currentdefinitions used in telecommunications, and/orbroadcasting to reflect current trends anddevelopments.

IV.2.2 Market entry and Licensing

Among the potential barriers identified in ChapterIII were a number resulting from the impact of thediffering market entry, licensing and operatingconditions in the sectors affected byconvergence. This raises a number of issueswhich are considered below:

Market Entry

The grant of special and exclusive rights byMember States is not incompatible with theTreaty rules, where such rights are justified for thefulfilment of a task of general economic interestassigned to the undertaking concerned andproportionate to the achievement of the objectivein question, even if those rights result in arestriction of competition or a barrier to the freemovement of services.

In this context, some would advocate that whereany network can potentially carry any service,public authorities should ensure that regulationdoes not stop this happening. They would arguethat to allow artificial restrictions on the use ofnetworks, or to maintain monopolies where otherparts of the converged environment are fully opento competition, may deny users access toinnovative services, and create unjustifieddiscrimination. Such an approach would be seenby them as running counter to the technologicaland market trends identified earlier in this Paper.

Barriers could occur in a number of ways:

(i) the grant of monopoly or special rights overnetworks or services to one or a small numberof companies, may prevent others fromproviding the same service;

(ii) limiting the services that can be offered over agiven network (for example, preventing atelecoms operator from using its network tooffer entertainment services)

(iii) requiring certain services (such as free-to-airbroadcast channels) to be carried, whichreduces the scope for other services to beprovided,

Others would argue that the grant of limited rightsor limiting the use of networks to particularpurposes are important ways of encouraginginvestment.

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Some also argue that these types of restrictionsare particularly important where competition is atan early stage or where a particular player enjoysa very strong position (for example, over acompeting network or over “premium” content). Insuch cases, specific safeguards can ensure thatpotential competitors are not discriminatedagainst or that there are adequate incentives forthem to enter the market. According to thisargument, appropriate safeguards might take theform of accounting separation or transparencyrequirements, structural separation or even fullline-of-business restrictions.

Licensing

Many activities and areas in the computing, andIT areas are not subject to licensingrequirements. That is likely to continue to be thecase in the future and the Commission sees noreason why there should be any change in thispractice, providing IPR issues are effectivelyaddressed.

At the same time, licensing is likely to remain akey regulatory tool through which publicauthorities can exercise control over their nationalmarkets, particularly in relation to the provision oftelecommunications and broadcasting networksand services.

Any assessment of the justification for, andeffectiveness of, licensing procedures must in thefirst instance be made in the context of thespecific sector to which these rules are applied.Nevertheless, the range of potential barriersidentified in Chapter III linked to licensingsuggests that this issue could need to beexamined more closely in the light of technologyand market trends.

Some commentators argue that a key aim mustbe to make it easier to get into the market and tomove towards lighter obligations applied in aconsistent manner across the convergedenvironment. They are therefore encouraged byexamples in the computing, Internet and on-linepublishing industries, where a degree of self-regulation, for example, in relation to harmful orillegal content on the Internet, has supplementedthe application of general laws, such ascompetition or consumer protection rules applyingacross whole range of economic activity. Evenso, self-regulation is not without risks for theInternal Market given the greater possibility fordivergent approaches in developing self-regulation,unless co-ordinated to some degree at aCommunity level.

At the same time, even where licensing systemsare not needed and self-regulatory solutions areproposed, consumers may still requireguarantees that their interests are adequately

protected and that the respective responsibilitiesof service providers and operators are identifiedwith regard to the consumer. Consumers shouldbe fully involved with the development andoperation of any self-regulatory approaches.

The global dimension of the Internet and othercommunications and broadcast services will alsoimpact on approaches to the enforcement oflicensing, and call into question the relevance ofnational licensing of activities carried out eitherwithin a Member State or delivered by regionalplatforms, for example, by satellite.

Encouraging innovation and efficientoperation through licensing. Awardingauthorities could consider moving away fromlicensing approaches which prevent innovation orlimit efficient operation. One example, in thetelecommunications area, would be tying thedelivery of services to a particular technologicalplatform - for instance, by requiring separatelicensing (beyond frequency assignmentprocedures) for a fixed network operator wishingto use wireless-based systems in the local loop.A new approach to the licensing of broadcastservices may be necessary. At presentbroadcasters are, generally speaking, licensed orauthorised on a channel-by-channel basis by therelevant authorities within each Member State.These systems, which are a product of traditionand the historical development of televisionbroadcasting services may require reviewing in anew multichannel digital environment.Possibilities such as the licensing ofbroadcasters for a set of services (such as asatellite package or a terrestrial multiplex), ratherthan for individual channels should be evaluated.The 1996 UK Broadcasting Act, which providesfor multiplex services licences for digital terrestrialtelevision, is an example of what is perhaps thebeginning of a trend that should be encouraged.

Common principles for the award of licensesAs indicated in Chapter III, divergent licensingconditions may deter market entry and act as abarrier to an internal market. Where such barriersare identified, they would have to be justified by apublic general interest objective and beproportional to that objective.

To avoid such divergence, there may be scope forapplying a common set of principles across theCommunity. These could include:

• the awarding authorities should beindependent from actors in the sector,

• procedures should be transparent and non-discriminatory, set against defined timetables,leading to decisions which should be open toappeal and

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• Any fees associated with a licence be inproportion to the level of effort involved inadministering the licensing process, and notconstitute a discriminatory levy on expectedprofits.

• Notwithstanding the previous principle, feesmay, in the case of licensing of radio-frequency be set at a level which encouragesthe efficient use of the resources allocated.

IV.2.3 Access to networks, conditional access systems and to content

The question arises as to whether rules for openaccess currently applied to telecommunicationsand digital television conditional accessinfrastructures should be applied more widely inthe sectors affected by convergence. If marketand technology trends develop as suggested inChapters I and II of this Green Paper,convergence is likely to see a shift in the valuechain, such that content production, packagingand service provision increase in value (though notnecessarily as separate business activities),whilst carrying services over a fixed or wirelessnetwork may, as reflected in some mergeractivity, become comparatively low valueactivities. This trend will be accompanied byattempts on the part of today’s network operatorsto extend their activities into higher valuebusiness areas.

Access at either end of the transmission network(i.e. the delivery of the service to the user’sphone, PC or television and the ability to accessthe network in the first place to offer services orcontent) will be of crucial importance.

In general the terms on which access is grantedto networks, to conditional access systems, or tospecific content is a matter for commercialagreement between market actors. Competitionrules will continue to play a central role inresolving problems which may arise.

This raises the issue of the role for sectorspecific rules at a Community level alongside thegeneral Treaty provisions promoting undistortedcompetition and the free movement of services.

EC legislation is now in place supportingcommercial agreements for the interconnectionand interoperation of telecommunicationsnetworks and services. Similar legislation is inplace in relation to digital television, in particularregarding Access by third-party broadcasters toconditional access systems.53

53 Directive 95/47/EC on the use of standards for the

transmission of television signals, O.J. No. L 281/51,23.11.95.

The emerging market will consist of players ofvery different sizes, but as indicated above therewill also be strong vertically-integrated operatorsfrom the telecommunications, audiovisual(principally broadcasting) and IT/softwareindustries building on their traditional strengthsand financial resources. Issues which could ariseacross the different sectors include bundling ofcontent and services, or of network capacity andservices, predatory pricing, cross-subsidisation ofservices or equipment, and discrimination infavour of own activities.

Furthermore, the predominant position of currentfixed telecommunications and broadcastingoperators in the residential market will mean thatfor the foreseeable future they will controlbottlenecks for accessing customers. Apart fromthe local subscriber loop, these includeconditional access and navigation systems.

Access to networks

As stressed above, as a general rule issues ofaccess to networks or to content, are a matter forcommercial agreement, subject to the applicationof competition rules. Nevertheless, in someareas, regulatory intervention to support thecommercial process has been provided for withincurrent frameworks.

In the telecommunications sector, the frameworkagreed for interconnection ensures that users cancontact any other user and that service providerscan access those customer on fair, non-discriminatory and proportionate terms.Additionally, powers to intervene and resolvedisputes are given to the national regulatoryauthorities for telecommunications and a numberof safeguards are put in place to ensure greatertransparency and non-discriminatory behaviour.

As indicated in Chapter III, the fact that an openframework is applied to one set of infrastructurebut not to others may create barriers and distortinvestment, particularly, if convergence oftechnologies extends over time to the industryand market and service levels. The issue in thecontext of possible convergence may therefore bewhether there is a case for the extension of openaccess principles such as those applied totelecommunications infrastructure to othernetworks, or whether there are other principleswhich might be developed.

Even within the telecommunications sector, thedevelopment of the Internet is raising a range ofissues connected to the terms on which Internetaccess providers get access to current fixed andmobile networks. One issue is whether theyshould enjoy the same interconnection rights asother players and whether they should be able toget access to unbundled service elements, whilst

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another issue is whether such providers in offeringa range of telecommunications services shouldshare some of the obligations of providingtelecoms services.54

The issue of access to conditional accesssystems may become more significant than theissue of control over the pipe up to the point atwhich it connects to such a system.

Again, in the telecommunications sector,Community policy does not require a fullunbundling of the local loop, or a structuralseparation of the associated infrastructure, fromthe provision of services carried over it. This doesnot exclude appropriate safeguards orrequirements being introduced under thecompetition rules. In reality, the issue ofunbundling of the local end of transmissionnetworks is complex and must be closely linkedto the degree of overall competition in the marketconcerned, the availability of viable alternativedistribution channels and the starting point forcompetition in the particular market. Some arguethat unbundling may act against the consumerinterest in the longer term by removing economicincentives for organisations to put their own wiredor wireless networks in place.

Conditional access systems

Conditional access systems are the technicalmeans by which content and service providerscan recoup their investment either throughsubscriptions or charges for individualconsumption. The Television Standards Directiveprovides a regulatory framework for conditionalaccess to digital television services, based on arequirement for those operating such systems tooffer broadcasters technical services on a fair,reasonable and non-discriminatory basis. TheDirective takes a deliberately balanced positionfor the start-up phase of this new industry. Itsrequirements are sufficiently light to encourageinnovation and investment in a rapidly evolvingtechnical and commercial environment, andsufficiently strong to protect fair competition andconsumer welfare. The Commission is concernedat the pace of implementation of this Directive intonational law in the Member States. It is activelyemploying the powers given to it by the Treaty toensure timely and correct implementation.Where incorrect implementation has occurred,the Commission has acted vigorously to ensureproper compliance with the Treaty.

54 For further discussion, see the OECD Report Op cit at

note 5. A number of the issues linked to the provisionof telephony over the Internet are also considered inthe Commission’s forthcoming Communication on thestatus of Internet telephony under Directive 90/388/EC

Navigation systems have emerged as a tool tohelp users manage the growth and range ofinformation and services in the InformationSociety. Examples of navigation systems includeBrowsers (e.g. Netscape, Microsoft Explorer),search engines (Altavista, Yahoo, etc.) andelectronic programme guides (EPGs).

Currently, they form two distinct marketsegments - Browsers and search engines aretools for exploring Internet web pages, whereasEPGs represent the electronic “zappers” of thefuture, guiding viewers through a myriad of digitaltelevision programmes and channels. Manyconsider that this new mode of programmeselection will lead to the demise of the channelconcept as we know it today, to be replaced bystrong umbrella brands complemented by à lacarte choices on the part of consumers.

Browsers and search engines are inherentlyindependent, able to explore the Internet universewithout tying themselves to particular sources ofinformation, or to particular operating hardware orsoftware. Recently, however, competitionconcerns have been raised about the possibility ofBrowsers being packaged with other software oreven becoming fully integrated to the softwareitself.

Conditional access and Navigation systemsdepend for their success on the co-operation ofmarket players present in different parts of thevalue chain, raising the spectre of a gate-keepingrole which could be abused, especially byvertically-integrated players, to foreclose marketentry by others. An extension of the principlesalready applied to the digital television field withthe object of ensuring that new entrants will notbe excluded from access to such systems shouldbe considered.

In contrast to Browsers, EPGs are linked to the‘information’ accessed via them developing assupport devices for specific digital televisionprogramme bouquets, or for offerings of televisionand interactive services. Issues of ensuring listingof third-party services or programming, and thequality of such listings, will be of criticalimportance.55 Exclusive arrangements tyingparticular EPGs to particular service bundles maybecome a problem requiring regulatoryintervention to ensure third-party access on fair,transparent and non-discriminatory terms.

55 Analogous problems have already been addressed

under European competition rules, for example, inrelation to computer reservation systems for air travelwhich are governed by Council Regulations 2299/89,3089/93, reviewed in COM(97)246 final, Brussels, 9July 1997.

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A new feature of the consumer’s home terminal isthe Application Programming Interface (API). TheAPI is a set of software in the terminal,resembling the operating system of a PC. It isused to manage interactive applications, includingEPGs, carried by the terminal, and to provide aspecified interface for the development ofapplications by third-parties. The PC industryowes its success in a large part to the role of defacto standard APIs in facilitating the creation of awide variety of third-party- developed applicationssoftware. At the time of writing there are anumber of different APIs used in set-top boxes inEurope, risking fragmentation of the market andproblems of interoperation. Furthermore thecombined use of proprietary APIs together withEPGs and conditional access leads to increasedof risks of abuse by operators controlling accessto services.

The market implementation of digital television isoccurring in an environment of rapid technologicalchange, the eventual outcome of which is not yetclear. Comments on this issue should thereforeassist the Commission in assessing whether theTelevision Standards Directive is adequate tocope with this technological change and itsmarket consequences.

Access to content

As a general rule, arrangements made betweencontent providers, rights owners and contentcarriers are a matter for commercial agreement.If exclusivity is granted, this may be an issue forcompetition rules. Exclusive agreementsbetween content providers and content carriersmay limit consumer choice by excluding accessto content provided by competitors, especiallyuntil there is effective competition in the provisionof delivery channels to the user. Possession ofrights to key content, such as major sportingevents, may give market players particularcommercial power.

Although the content industry is heavily scale-dependent, it generally exploits such economiesof scale by careful management of distributionwindows (e.g. cinema, video rental, video sell-through, pay-per-view, pay television, free-to-airtelevision). Exclusivity of distribution is often afeature which secures this process for contentowners. Convergence may impact on the currentbasis for window management, and could lead toa greater dependence on non-exclusive electronicdistribution as a more effective means ofmaximising revenues.

Likewise, convergence may have the effect ofdissolving conveyance bottlenecks. For example,the exclusive distribution rights awarded to cabletelevision companies may no longer translateautomatically into monopoly power at the service

level. Cable companies are likely to competewith digital satellite and terrestrial televisionbroadcasters, Internet access providers andtelecommunications operators.

IV.2.4 Access to the Frequency Spectrum

Despite the fact that the digitisation underlyingconvergence significantly expands the potentialcapacity of transmission networks, the growth ofdemand, both in terms of market players andbandwidth, means that resource issues willcontinue to be a key regulatory issue; principleamongst these is access to radio-spectrum.

Frequency spectrum remains a key, but finiteresource even in the digital age. Whilstsignificant gains will ultimately result from aswitch from analogue to digital technologies, bothfor mobile telephony and for broadcasting, anytransition will remain a slow one. For Internetaccess and other on-line services, satellite-baseddelivery offers the possibility of high speeddelivery to a PC or television and the use of thefixed telecommunications network as a returnpath. In addition, the take up of wireless localloops and the arrival of Universal MobileTelecommunications Services (UMTS) early in thenext century all point to a steady growth indemand for spectrum.

Given the importance of spectrum, variationsidentified in Chapter III between sectors withregard to how much spectrum is available andhow much that spectrum will cost may have animportant impact on the development of existingand new delivery channels. Whilst overallallocations are determined at an international andregional level, current differences across sectorsto the pricing of frequency may create potentialcompetitive distortions. One example could bewhere a broadcaster offering multimedia or on-lineservices uses spectrum obtained free or at lowcost, competes with operators from thetelecommunications sector who have paid a pricereflecting the commercial value of the resourceallocated.

Many commentators argue that, from aneconomic standpoint, pricing spectrum mayencourage its more efficient use and may help toensure that frequency is allocated to the areaswhere it is most needed. They would argue thatsimilar commercial principles should influencefrequency policies at the stage that allocation isdetermined within the World Radio-communications Conferences or at a regionallevel, so that allocation decisions should seek tomake spectrum available to high value users inpreference to low value users.

Were all spectrum to be subject to a commercialvaluation this might have a knock-on effect of

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encouraging existing public users, such as themilitary or the police, to use more cost-effectivetechnological solutions, freeing up certainfrequency bands for new services.

Frequency auctioning is favoured by manyeconomists as the way to best ensure outcomeswhich are in the consumer’s ultimate interest.Although others express concern about theimpact of such pricing on prices charged tousers.

With regard to efficient use of spectrum, oneapproach could be to move away from currentpractices of assigning particular blocks ofspectrum to particular services, or to the use ofparticular technologies to deliver such services.In such a situation, certain minimum technicalsafeguards would still be required, (e.g. againstelectro-magnetic interference between differentsystems). This is one of the issues raised in thecontext of the introduction of UMTS, but could beof wider application. In practice this might meanthat instead of assigning a particular band ofspectrum exclusively for the provision of mobilecommunications or broadcasting, the assigneecould be allowed to use the spectrum for theservices of its choice.

Finally, increasing demand for spectrum,particularly for UMTS and for satellite-basedservices puts increasing pressure on existingmechanisms for frequency co-ordination at aregional level.

Chapters I and II have illustrated how each part ofthe converging sectors are moving from analogueto digital technologies. Member States couldplay a key role in this process by developing cleartimetables for such a switch in order to giveclarity to service planning Others argue that thisis an issue of user preference and should be leftto market forces. Nevertheless, the level ofdemand for spectrum is likely to outstrip currentlyavailable frequency resources, so thatGovernments may have a key role in reassessingthe current balance between telecommunications,broadcasting and civil/ State usage of availableresources.

Additionally, consideration might need to be givento whether such a switch over needs to be co-ordinated at a European level. It can be arguedthat a clear timetable for the complete transitionfrom analogue to digital transmission of servicesusing the frequency spectrum would avoid notonly the fragmentation of the Internal Market, butalso delays in releasing valuable spectrum usedby analogue services today, to other users.Other argue that issues of frequency allocationsuch as this are governed by the subsidiarityprinciple and that the Community has no role toplay in their resolution.

IV.2.5 Standards

It has been argued in this Paper that one of themost important consequences of the blurring oftechnological borders between informationtechnology, telecommunications and consumerelectronics is the increasing globalisation ofservices. The inherently global nature of theInformation Society calls for any standardisationin support of its development to be similarlyglobal. Users may want access from anyterminal to any service, independently of thetechnology used, or the geographical point ofsuch access, within a multi-vendor environment.

A major objective for standardisation therefore isto achieve interoperability between networks andservices. Technological harmonisation is not anobjective. However, standardisation is a toolwhich can reinforce both general policyobjectives, such as the creation of an InternalMarket for communications services, and theregulatory framework. Encouraging bestbusiness practices in areas related to dataprotection and security of digital signatures maybe supported by standardisation and consensus-building within an appropriate regulatoryframework.56

There is a legitimate public interest in providingindustry, users and public authorities with efficientplatforms for consensus building both atEuropean and international level. Even though theInformation Society is global, standardisation canstart at regional level, provided that players fromother regions can participate in the activities. Theworkshop mechanism has the potential to offerthe platform for consensus-building while it alsoallows European players to increase their impacton the international standardisation scene.

IV.2.6 Pricing

The IT and on-line publishing markets operatealmost entirely free of specific price controls. Inthe broadcasting sector, price controls (e.g. onthe licence fee), where they exist, are generallymotivated by public interest objectives seeking toensure that service remains affordable for viewersand listeners, so that high penetration is achievedfor free-to-air channels. The affordabilityrequirement for universal service intelecommunications is based on the samepremise and translates, in a number of MemberStates, into a price cap mechanisms applying toa basket of retail and/or business services and tosubsidised social tariffs for particular groups ofusers. Pay TV channels including premiumservices, as well as commercial activities of freeto air regulators are not generally subject to price

56 Op.cit. Note 60

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regulation, but are subject to competition fromother market operators.

Additionally, under specific telecommunicationsregulation, as part of the transition to fullycompetitive markets, controls apply to operatorswith significant market power to require that thecharges for interconnection, voice services andleased infrastructure are cost-oriented. In thatsituation, price regulation is acting in as a proxyfor the effects of competition. There has been nodirect analogy in the case of point to multi-pointbroadcasting, but interconnect issues are nowarising where interactive or transactional elementsare being introduced - conditional access is thefirst such area.

Innovative pricing packages will play a key role inpromoting services in the Information Society.The take-off of many on-line and transactionalservices is directly influenced by the cost of theunderlying infrastructure. A key commercialmessage must be that innovative pricing will becentral to a much wider take up and use of on-lineand other services.

Additionally, an assessment may need to bemade as to whether there are potential distortionswhere differing pricing rules apply to differentnetworks, even though in a convergedenvironment any network may be able to offer anyservice. At the same time, the existence ofcompetitive delivery channels is likely to limit thepossibility to set prices, for example for networkaccess, independently of competitors, so thecase for regulatory intervention may not be made.

Finally, convergence may over time expose publicbroadcasters to commercial pressures. Theexperience in telecommunications may beillustrative, as operators in this sector have movedover time to price their services in a manner moreconsistent with the increasingly competitiveenvironment, notwithstanding the regulatoryconstraints on such pricing.. Such experiencedemonstrates that such adjustment in pricingstructure can occur in a manner which does notaffect adversely the overall affordability of theservices delivered. The manner in which publicbroadcasters are currently funded (licence fee,advertising, public subsidy) does not allow adirect analogy with telecommunications to bedrawn. Whether this should prevent broadcasterswishing to introduce different pricing structures isa matter for comment, as is the impact that morecommercial pricing approaches would have oneligibility for State funding or the ability to accessother revenue sources, such as advertising,subscription funding or exploitation of rights.

Question 5:Overcoming the barriers - Getting the right

regulatory framework for business and forconsumers

Chapter IV.3 examines in a number of key areaswhere regulatory solutions may be needed toovercome barriers and to safeguard competition.

(A) Are the definitions in the telecommunic-ations, media and IT sectors in national and/orCommunity legislation adapted to theconvergence process?

(B) Will the convergence phenomenonrequire adaptation of existing approaches or theadoption of new approaches to be applied toissues of market entry and licensing; access tonetworks, customers (including conditionalaccess systems), content; and pricing?

(C) Will convergence require changes in theapproaches to the award and pricing of frequencyspectrum, and in particular what approach shouldbe taken, in the light of convergence, to the issueof completing the transition from analogue todigital services, including the need for a timetablefor analogue switch-off?

(D) What should be the objectives ofstandardisation in the light of convergence andwhat should be the relationship between regionaland international standardisation?

(E) What additional action (if any) is requiredto ensure that the interests of consumers and ofusers with disabilities are respected in the light ofconvergence?

IV.2.7 Individual consumer interests

The objective of maximising benefits andminimising the risks of consumers implies theneed for the creation of adequate regulatoryinstruments to protect the fundamental rights andresponsibilities of consumers arising from thewide circulation of information in the sectorsaffected by convergence. Privacy issues,responsibility for content and the protection ofminors, free speech versus libel, appropriatejurisdiction and consumer representation, aresome of the issues that need to be addressed inthe new environment.

IV.3 Meeting public interest objectives

Rules seeking to ensure the achievement ofcertain public and general interest objectives arefound in all sectors affected by convergence. Ashighlighted above, this is fully consistent with theimportance attached at a European level to therole of services of general economic interestwithin the Community concept of EuropeanSociety. The trends identified in Chapters I and II

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do not remove the value of universal serviceregulation for telecommunications, or a publicservice mission in the broadcasting field. Indeed,the possibilities now offered by technologystrengthen the need for clear and effective rulesrelating to specific objectives such as privacy anddata protection; the promotion of cultural diversityor the need for a framework for the protection ofminors and public order.

Nevertheless, the impact of convergence may wellbe on the way such objectives are achieved andby whom. Equally as recognised in Chapter III,the different rules while adapted to the specificcharacteristics of each sector, may neverthelesscreate potential barriers to integrated serviceprovision or cross-border operation.

The need for public interest objectives to beclearly defined

Universal service obligations in general ensure theuniversal availability of defined services at anaffordable price, whilst the public service missionof broadcasters extends beyond issues ofuniversal availability and price and lays downconditions relating to the content of the servicesprovided. Against this background the startingpoint for any analysis of public interest objectivesin the light of convergence must be the need todefine public interest objectives so that marketactors have a clear idea of the obligations withwhich they must comply. Some consider thatsuch an assessment is also essential in order togauge whether these objectives remain valid inthe face of the evolving communications andmedia environment, whilst others argue that theobjectives remain valid and only the way in whichthey are satisfied may evolve. In either case, aproper assessment seems to require a clearidentification of underlying objectives.

In the case of certain objectives in the differentsectors, specific obligations have been placed onone or more operator to guarantee theseobjectives. This is the case with universal servicecarriers in the telecommunications sector orbroadcasters who have been given a publicservice mission. In the telecommunicationscase, the cost of those obligations may, wherethey represent an unfair burden for the operatorconcerned, be shared with other market players.

Some argue that given that such a frameworkexists within telecommunications, the absence ofa similar framework for the public service missionin broadcasting will deter companies wishing tooperate on an integrated basis or favour theposition of those entering the telecommunicationsmarket from the media side. Others respond thatconvergence does not challenge the existence ofdifferent approaches, given the underlyingobjectives are quite different. They further argue

that it is simply not possible to cost obligationsrelating to the public service mission in anymeaningful way, and that comparisons with theexperience of telecoms are unhelpful in thisregard.

A further issue is who might in future be able tofulfil a public service mission or offer universalservice? Obligations have traditionally fallen on asingle designated organisation, (though that isnow changing in the case of universal service insome Member States). However, the possibilityof offering voice telephony services over acomputer or a television, or the ability to use theInternet to read, watch or listen to broadcasters’programming illustrates the possibility that newplatforms may play a role in meeting suchobligations. The question arises as to whetherthis is an additional reason for such obligations tobe properly identified.

Additionally, the issue is whether existingframeworks should be changed in order to createa coherent framework for both public and privatebroadcasting organisations, for example so thatdifferent organisations are allowed to bid toundertake such obligations, includingorganisations from outside the traditional sector.Where specific support in the form of industry oreven public funding is available for the provision ofsuch services, the issue arises, inter alia, as towhether that mechanism would need to be opento any organisation willing to be designated asfulfilling public interest obligations.

Content-related objectives

Convergence is already leading to areassessment of approaches to the means ofimplementing objectives regarding content. Thishas already been the case with approaches toharmful and illegal content on the Internet (seeSection IV.1). At its most basic, the centralissue is not the validity of particular rules butwhether the impact of technology on particularservices requires a reassessment of the means ofachieving the objectives in question.

Essentially this is an application of the principleof proportionality which means that currentapproaches must be assessed in the light of thespecific characteristics of the service concerned.This means that there does not have to be asingle standard applicable to the same contentwhatever the channel used for distribution.Instead, different standards might apply. Forexample, it is likely that the controls applied toadvertising on a free-to-air broadcast would beconsidered inappropriate, if applied to a pay-TVprogramme or an Internet service, because of thespecific characteristics of the service concerned.

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The role of public service broadcasting

The public service mission entrusted to publicservice broadcasters is recognised as of culturalimportance and the organisations withresponsibilities in this regard are entitled toappropriate funding, subject to compatibility withthe rules of the Treaty. The recent Protocol onpublic broadcasting attached to the AmsterdamTreaty confirms this point.57

Convergence may however enable many moresources of audiovisual information to be accessedby viewers. Public authorities will need to monitoron a continuing basis the extent to which desiredpolicy objectives are being achieved by normalmarket activity, including the impact of othermedia, and whether, as a consequence,regulatory obligations placed on broadcastersmay be lightened.

Traditional public broadcasters will need toreappraise their role in the convergentenvironment. On the one hand, their marketshare is likely to diminish as users face anincreasing choice in a market already near tosaturation in terms of the individual potential forconsumption of audiovisual services within a 24-hour day. Moreover, escalating prices forpremium content could subject them to budgetarypressures that might outstrip the capabilities ofexisting funding mechanisms. The issue will bewhether public broadcasters can continue to haveaccess to attractive content in the face of fiercecompetition for the acquisition of programmerights, within the constraints of their existingfunding mechanisms. Many are preparing toexploit their reputation and their customers’“brand loyalty” to compete with new pay-televisionbroadcasters.

On the other hand, technological convergenceoffers public broadcasters a range of newpossibilities, in terms of both activities andpotential avenues to viewers and listeners. Thiscan enhance their current role and providevaluable new sources of revenue alongside currentfunding. The regulatory framework should allowbroadcasters to take advantage of these newopportunities. It should also permit them tobenefit from economies of scale and scope wherethese also bring benefits for the consumer.However, if state funds intended to support apublic broadcaster in fulfilling its public servicemission were used to leverage and cross-subsidise these new activities or the use of newtechnological platforms, such as the Internet,then such practices would be subject to the

57 Protocol no 32 on the system of public broadcasting in

the Member States, annexed to the EC Treaty.

Treaty rules on competition and on the freedom toprovide services..

Other general interest objectives

Ensuring Privacy and Data Protection. In orderfor convergent services to develop, users need tobe assured that their privacy is adequatelyprotected and, in particular, to have confidence inthe security of information passed over thenetworks they use. Legislation has already beenagreed at a Community level addressing dataprotection58 and this will soon be complementedby specific rules governing data protection andprivacy in telecommunications.59

Cryptography and digital signatures. A recentCommission Communication on digital signaturesand encryption has recommended a number ofactions aimed at ensuring security and trust inelectronic communications.60 Given the globalcharacter of electronic commerce, emphasis isbeing given to the need for the internationalavailability of cryptographic products and servicescorresponding to the various needs of businessand individuals.

Cultural diversity. The European Court ofJustice, in a landmark case involving the mediasector (“TV10” CJEC 23/9 of 9.10.94), hasrecognised that cultural policy objectivesconstitute public interest objectives that aMember State may legitimately pursue. Publicservice broadcasting has historically been onevehicle for achieving this. The Protocol on thissubject that will be appended to the EC Treaty,as amended by the Treaty of Amsterdam,highlights the fact that “the system of publicbroadcasting in the Member States is directlyrelated to the democratic, social and culturalneeds of each society and to the need topreserve media pluralism”.

At Community level, Article 128 of the EC Treatyprovides that the Community “shall contribute tothe flowering of the cultures of the MemberStates” including in the audiovisual sector, andthat the Community shall also “take culturalaspects into account in its action under other

58 Directive 95/46/EC of the European Parliament and

Council of 24 October 1995 on the protection ofindividuals with regard to the processing of personaldata and the free movement of such data, OJ L281,23.11.95.

59 Proposed directive on the processing of personal dataand the protection of privacy in thetelecommunications sector,....,Common Positionadopted by the Council on 12.9.96, O.J. 96/C 315/06,24.10.96.

60 Commission Communication Towards A EuropeanFramework for Digital Signatures And Encryption,COM(97) 503, October 1997

30

provisions of the Treaty”. The Commissionintends to draw up a Green Paper in the course of1998 specifically focusing on developing thecultural aspects of new audiovisual andinformation services.

Protection of minors and public order. Whilepublic interest objectives relating to the protectionof minors and public order have traditionally beenrecognised at national and Community level (cf.,for example, Art. 22 of the “Television withoutfrontiers” Directive), the transactional nature ofsome convergent services will imply adjustmentsin the means whereby such objectives are met inorder to ensure due respect for the principle ofproportionality.

Additionally, the difficulty of enforcing safeguardsin the context of harmful and illegal content on theInternet provides another example of howconvergence is challenging traditional regulatoryapproaches to implementation, whilst notinvalidating the principle that rules are seeking toprotect.61 The global nature of the platform andthe difficulty of exercising control within a givenMember State are leading to solutions which drawon self-regulatory practices by industry ratherthan on formal regulation, accompanied bytechnological solutions to ensure that parentstake greater responsibility. It is against thisbackground that the Commission has adopted aproposal for a Council Recommendation on theProtection of Minors and Human Dignity.62 Thisaims to promote common guidelines for theimplementation, at national level, of a frameworkfor self-regulation to protect minors and humandignity in audiovisual and information services,whatever the means of conveyance.

Question 6: Securing public interestobjectives in the light of convergence

Legislation at Community level meets a range ofpublic interest objectives. This was alsoexamined in Chapter IV.3. Current developmentsmay well result in new ways of achieving suchobjectives. Where such objectives are achievedtoday by placing obligations on one or moremarket actors, (such as universal serviceobligations in telecommunications or a publicservice mission vested in certain broadcasters)new technologies and services may enrich theservices being offered.

(A) Does the convergence phenomenonsupport or challenge the way in which public

61 Commission Communication, Action Plan on promoting

safe use of the Internet, COM(97)583, 26.11.9762 Proposal for a Council Recommendation on the

Protection of Minors and Human Dignity adopted on18November 1997. COM(97)570.

interest objectives are achieved in thetelecommunications, media and IT sectors?

(B) Should such objectives be more clearlyidentified and. where they translate into particularobligations, should a wider group of actors beable to take on such obligations?

IV.4 Options for a future regulatorymodel

Options for the structure of regulation

Chapter III highlighted the potential uncertaintyresulting from separate and multiple regulation.Such uncertainty was seen as a barrier to currentactors wishing to operate across the sectorsaffected by convergence, and to the wider deliveryof services such as electronic commerce orfinancial services (banking, insurance, securities,etc.) over converged platforms.

Some commentators accept that there arebarriers, but see these as neither insuperable norinconsistent with the EC Treaty. In practicalterms they simply represent normal divisions ofactivity common with any business operatingacross a number of sectors of the economy.They would argue that current vertical approachesto regulation are sustainable and provide a highdegree of certainty for most market actors.

An alternative view sees these barriers as runningcounter to the logic of current technological andmarket trends. According to this view, a singleregulatory model for all sectors within a convergedenvironment, based on common principles, butperhaps maintaining certain distinct elementsfocused on the specific services offered, isrequired.

Others argue that any horizontal approach shouldreflect the technological reality of the possibility ofany network carrying any service and thereforeconfine the development of a horizontal approachto issues affecting the underlying infrastructure.This would allow different treatment of theservices provided via that network. Roles appliedat a service level might perhaps follow currentvertical divisions at the service level or perhapsredraw those divisions to reflect changes intechnologies and markets.

In both of these cases, the approach isessentially to shift away from a vertical model ofsectoral regulation and towards a horizontalapproach which seeks to distinguish between thenetwork or transmission layer within convergingsectors and the services carried over thosenetworks

31

Two studies carried out for the Commission63

suggest that the replacement of current verticalstructures with horizontal separations betweenservice provision/content and conveyance appearsto offer a possible solution to the types of thebarriers identified in Chapter III.

Definitional issues of where services may fall willremain, but should be more future proof, beingless linked to underlying technologies. Thedistinction between the two horizontal layersnonetheless permits distinct regulatory criteria tobe applied to each layer, but with due recognitionof the links between each layer.

Chapter III highlighted the impact on companies ofhaving to deal with a number of different regulatorybodies for different aspects of their integratedactivities. Ensuring that these barriers arelowered will be important in creating a climate forinnovation and investment.

Were the idea of moving from vertical regulatorydivisions to a more horizontal approach accepted,this might make it easier for business to benefitfrom a one-stop shop approach.

One important question is whether suchrationalisation should lead to a single regulatordealing with all aspects - content as well asservice provision and delivery, or whether astructure dividing responsibilities betweenservices and transmission activities might bemore appropriate, or indeed, multiple regulatorybodies at either of those layers. Some wouldview a single body as more able to maintain acoherent approach, integrating more seamlesslythe public interest and economic efficiencyaspects of regulation within one framework.Others would favour a continued separation inorder to avoid risks of the public interest beingcompromised by economic priorities.

Nevertheless, inherent in the idea of convergenceis the reality that a strict separation betweenservice provision on the one hand, andtransmission and carriage on the other may notbe possible and could create difficulties inaddressing issues of market power and verticalintegration.

Balancing Community and Member Stateresponsibilities

In looking at the options for a possible futureregulatory model, account must be taken of theway in which responsibilities will continue to beshared between the Community and MemberStates and within Member States, betweennational, regional and sometimes localauthorities. From a Community perspective, the

63 Op.cit. 19

EC Treaty defines on the basis of subsidiaritythose areas in which the Community has a role toplay. Such action may be taken, assuming it isan area for which the Community is competent,“only if and in so far as the objectives of theproposed action cannot be sufficiently achievedby the Member States and can, therefore, byreason of the scale or effects of the proposedaction, be better achieved by the Community.”

Question 7: The future shape of regulation

Chapter IV.1 raised the challenge of theconvergence process to the principlesunderpinning current regulation, whilst ChaptersIV.2 and IV.3 considered a range of substantiveregulatory issues.

Chapter IV.4 discusses how those principles maybe applied in future, separately to each sector, or“horizontally” across different market sectors. Italso raises related issues about the number ofregulatory bodies and the balance betweenCommunity and national level action.

(A) Do current developments require areassessment of the way in which rules areapplied to the telecommunications, broadcastingand IT sectors?

(B) Does the existence of different regulatoryauthorities or ministries responsible for differentaspects of telecommunications, media and ITactivities offer a workable structure for regulatorysupervision in the light of convergence?

(C) Will convergence require a reassessmentof regulatory responsibilities at a national,Community or international level, and, if so whichareas?

Given the regional and global nature of many ofthe services being delivered, that subsidiarity testmay be met. Diverse national approaches mayharm rather than promote users’ interests, couldundermine the diversity which the internal marketoffers, and may well introduce distortions whichfavour the establishment of production facilities inregions where a lighter regime applies.

IV.5 Issues at an International level

Globalisation amplifies the international dimen-sion of convergence. One clear example is thecontinued rapid expansion of the Internet world-wide, which will undoubtedly give rise to furthertechnological and industrial transformations, aswell as to exciting social, cultural, and ultimately,commercial opportunities. These effects will notbe confined to the European Community andNorth America only. They are just as likely to

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produce fundamental changes among ourneighbours in Central and Eastern Europe, andmore broadly, in the developing world. The globalreach of the Internet has already shown a need forinternational solutions to a number of key issuessuch as security, intellectual property rights,customs, privacy, interoperability and cybercrime.

In contrast, many regulatory issues associatedwith telecommunications and broadcasting haveuntil recently been focused at national or regionallevels in the Community, given the nationalorientation of licensing in those sectors.

Multilateral dialogue on frameworks coveringdifferent aspects of telecommunications andinformation technology, and involving governmentsand industry, is currently being pursued in manyinternational fora. The Commission, through aseries of international summits on the InformationSociety, has been actively promoting a range ofregulatory initiatives in the countries of Centraland Eastern Europe.

Existing international organisations, such as theWorld Intellectual Property Organisation (WIPO),the ITU and the OECD have perceived the need toconsider the potential impact of convergence andto launch Internet and electronic commercerelated activities. Convergence was the theme ofthe ITU’s Sixth Regulatory Colloquium.64 In somecases, this has already led to agreement onprinciples or minimal rules. Examples include thetwo WIPO Treaties of December 1996 oncopyright and certain related rights (the “WIPOCopyright Treaty” and “the WIPO Performanceand Phonograms Treaty”), and the BonnDeclaration of July 1997.

The Council of Europe is currently working onaspects of the Information Society relating tohuman rights, democratic values and the freedomof expression and is expected to adoptResolutions on these issues at the 5th EuropeanMinisterial Conference on Mass Media Policy inThessaloniki in December 1997

Landmark global agreements such as theInformation Technology Agreement (ITA), theMutual Recognition Agreements on conformityassessment (MRAs), and the WTO/GATSagreement on basic telecommunications services(February 1997) have also contributed to a newglobal perspective on regulatory issues. TheWTO agreement does not apply to broadcasting.

64 The Regulatory Implications of Telecommunications

Convergence, Chairman’s Report of the SixthRegulatory Colloquium on the changing role ofgovernment in an era of Telecom deregulation, ITU,Geneva, 11-13 December 1996.

As these efforts are reinforced, it may becomeapparent that they need to take into account newfactors such as convergence and globalisation, aswell as the impact of these changes oneconomies beyond the industrialised world. Forexample, the Internet could give rise to spill-overbetween issues dealt with by differentorganisations and currently involves importantnew and less conventional actors, such as theInternet Society.65 Furthermore, any formalprinciples and rules will most likely need to drawon some element of self-regulation by industryplayers.

In this context, it might be judged moreappropriate to launch a process of internationaldialogue with the aim of reaching agreed solutionsas and when problems arise in conjunction withtechnological, social and industrial developments.Such a process would be flexible and open. Itwould have no formally fixed time-frame and wouldbe open to all actors concerned, includinginternational organisations, the various Internetbodies (e.g. the Internet Engineering Task Forceand the Internet Advisory Board), and technicalexperts. Such an international dialogue processcould give rise to the creation of specific workinggroups with a view to focusing on specific issuessuch as digital signatures or customs andtaxation. The overall aim of such a process, onceit has been launched, could be to develop aninternational charter on global communications,though the scope and aims of such a charterremain to be defined.

Question 8: The international aspects ofconvergence

Chapter IV.5 examines a range of internationalactivities underway which are linked toconvergence, as well as to specific aspectsimpacting on it, such as the Internet, IntellectualProperty Rights, and Electronic Commerce. Italso highlights the opportunities whichconvergence offers to our partners in Central andEastern Europe, and more widely to the world’sdeveloping economies.

(A) Is further action required at aninternational level in light of convergence?

(B) What additional steps (if any) arerequired to encourage other countries,particularly, in Central and Eastern Europe, tocreate conditions within which currentdevelopments can be exploited?

65 The Internet society is a non-governmental professional

organisation whose aim is to develop a consensus onsolutions which promote progress of the Internet.

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Chapter VPrinciples and options for the future

Whilst the aim of this Green Paper is to invitecomment and stimulate debate, rather than takepositions at this stage, this Chapter, drawing onthe previous analysis, sets out in Section V.1below a number of principles which could providea common basis for future approaches in thesectors affected by convergence. In Section V.2,it sets out three options which the Commissionbelieves may stimulate debate regarding theadaptation of current regulatory approaches,where required, in the light of the convergencephenomenon.

V.1 Principles for future regulatory policy in the sectors affected byconvergence

Irrespective of whether or not full convergenceoccurs, the range of technological and markettrends, the potential barriers and the regulatoryissues identified in this Green Paper, all point to achanging environment against which the policyobjectives of these sectors must be judged.Future decisions must therefore not only bederived from regulatory approaches closelytailored to the sectors involved. They should alsobe able to draw on a common understanding ofprinciples which could underpin future action.

In this section, the Commission tentatively putsforward five such principles for comment.

1. Regulation should be limited to what isstrictly necessary to achieve clearlyidentified objectives.

Given the speed, dynamism and power ofinnovation of the sectors impacted byconvergence, public authorities must avoidapproaches which lead to over-regulation, orwhich simply seek to extend existing rules inthe telecommunications and media sectors toareas and activities which are largelyunregulated today.

Any rules put in place should be tailored tomeet clearly identified objectives in aproportionate manner,

2. Future regulatory approaches shouldrespond to the needs of users

A key priority of any regulatory frameworkshould be to seek to meet the needs of usersin terms of offering them more choice,improving levels of service and lower prices,whilst fully guaranteeing consumer rights andthe general public interest. Such an approachis fully consistent with wider policy goalswhich recognise the important role of many of

the sectors in bringing the Information Societyinto citizens’ everyday lives.

3. Regulatory decisions should be guided bya need for a clear and predictableframework.

Regulators should seek to ensure a clear andpredictable framework within which businesscan invest. Where issues can be left to marketplayers, this should be made clear. Wherenew activities creates uncertainty as to howand if they should be regulated, this should beclarified.

This does not mean that the framework maynot evolve, but it should do so againstpredetermined criteria, maintaining as far aspossible the flexibility to respond to changesin a fast-moving market.

4. Ensuring full participation in a convergedenvironment.

Building on existing concepts of universalservice in telecommunications and the publicservice mission in broadcasting, publicauthorities should seek to ensure thateveryone is able to participate in theInformation Society. Convergence in thiscontext is likely to offer new means ofparticipation.

5. Independent and effective regulators will becentral to a converging environment.

Whilst the general trend is towards lighterregulation, the increased competition broughton by convergence underlines the need foreffective and independent regulators.Regulatory independence is particularlyimportant where the state retains a share-holding in any market player.

V.2 Options for regulatory development

If it is established that there is need to considerchanges to the overall regulatory approach in theface of the trends towards convergence, theremay be many ways of achieving such anadaptation.

In considering possible approaches, a successfulformula is likely to require more than just thecreation of a flexible framework for new types ofservices. It would also be essential to provide aroad map which allows the existing framework toadapt or be adapted at a pace which continues toensure fair, non-discriminatory market conditionsand which provides that users’ interests are wellserved.

The speed and manner in which change ismanaged are at the heart of the transitionalissues. This Green Paper cannot propose a

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specific time table. Nevertheless, theCommission anticipates the debate focusingaround three basic options for regulatorydevelopments, though such a list is neitherintended to be comprehensive nor closed.

Option 1: Build on current structures

In this situation, current vertical regulatory modelswould be left in place. This means that differentrules apply in telecommunications andaudiovisual/broadcasting sectors, and to a lesserextent in publishing and IT. Building onestablished principles, these existing frameworksat a EC and national level would be extended onan ad hoc basis, principally at national level, tomeet the demands of a competitive market andthe challenges of new technologies and services.

Normal principles of interpretation would beapplied on a case by case basis to resolvequestions of where particular activities might fall.To the extent necessary, co-ordination might bestrengthened at a European level to attempt tominimise the risk of fragmentation throughnational rules being applied differently in differentMember States to emerging services.

The pace of change would be dictated by thespeed of innovation and the effectiveness ofcompetition. This would allow the regulatoryframework to adapt in response to market forcesand the need for a fresh round ofderegulation/regulation could be avoided.

Such an approach would minimise the need forchange in the near future, and could be effectivein providing a predictable regulatory framework forinvestment, whilst avoiding the creation ofunjustified barriers within the internal market.However, it might leave in place certain anomalieswhich today deter investment.

The pace and scope of change, if not co-ordinatedat a European level, could risk creating significantnew barriers between Member States and slowingthe transition to the Information Society.

Option 2: Develop a separate regulatory modelfor new activities, to co-exist withtelecommunications and broadcastingregulation

This option would mean that Member Stateswould “carve out” new services and activitieswhich cross traditional boundaries, placing themunder a distinct set of rules, if rules are needed atall. This would allow a co-ordinated approach tobe developed in relation to many of the high valueactivities which characterise the convergingmarket place, by creating a new category ofservices alongside existing regulatory models fortelecommunications and broadcasting.Essentially, the result would be to move away

from technology-based or platform-based marketboundaries for a wide-range of services, whilstallowing the framework for traditional coretelecommunications and broadcasting activities tobe adapted more gradually.

The principle difficulty in such an approach isdetermining the boundaries of what may be part ofa lightly regulated, new service world and whatremains subject to traditional regulation. Oneapproach might be to identify certain types ofservice, e.g. Web-TV or the Internet or theoperation of conditional access systems,negatively as neither telecommunications norbroadcasting. Experience in the telecommunic-ations sector with a delimitation of liberalisedservices, on the basis of defining only what is leftin the monopoly area, shows the practicaldifficulties of such an approach.

Option 3: Progressively introduce a newregulatory model to cover the whole range ofexisting and new services

This option is the most far-reaching. It calls for afundamental reassessment and reform of today’sregulatory environment.

This does not necessarily imply a whole new setof laws, but rather looking to see how existingframeworks can be adapted to promote flexibility;remove inconsistencies, avoid discriminationwithin and across sectors and continue to ensurethe achievement of public interest objectives.Instead of applying to just some services (asproposed in Option 2), this option would create aframework covering all sectors.

This option would require a broader definition ofcommunication services to supersede those oftelecommunications and audiovisual serviceswithin Community legislation. Proportionalitywould be a necessary feature of the newenvironment given that within such a broaddefinition, the level of regulation would have to bematched to the nature of the service and theintensity of competition.

Such an option might be considered to be tooambitious. However, it would not necessarily leadto sudden disruptive change. The approach couldbe graduated, focusing in the first instance onpriority areas in which a consistent regulatoryapproach is required (e.g. network operation oraccess issues). Another key feature of thisapproach would be to allow sufficient time formigration from the old to a new regime.

Question 9:Principles and possibleapproaches in the light of convergence

Chapter V identifies a number of important policyprinciples which could underpin future regulatoryapproaches in the light of convergence. It also

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proposes three possible ways in which currentregulatory approaches in the different sectorsmight be adapted in order to embrace on-goingdevelopments.

(A) What effect will convergence have on theprinciples for future regulation applied in thetelecommunications, media and IT sectors, andshould those principles be adapted in the light ofconvergence?

(B) If convergence requires adaptation ofexisting regulatory approaches, should thatadaptation:

(i) seek to build on, and if appropriate, extendexisting frameworks, rather than create newones;

(ii) create a new framework for many on-line andinteractive services, to co-exist with the thosecurrently applied to traditional telecommunic-ations and broadcasting activities, or

(iii) seek to create a comprehensive frameworkapplying similar regulatory approaches to allthree sectors.

V.3 Timetable for future action

The following outline schedule of activities isenvisaged:

• A five-month public consultation period(December 1997 to April 1998 inclusive).

• A report on this public consultation to beprepared by June 1998.

• The Council and the European Parliament areexpected to adopt any Resolutions on thismatter in the second quarter of 1998.

• In response to these resolutions, theCommission could prepare a ConvergenceAction Plan by the end of 1998.

• The already-announced TelecommunicationsReview will be conducted in 1999.

Interleaved with these milestones will be anumber of important activities in the media field.The Oreja High-level Group on audiovisual policyhas been convened and is expected to report inSeptember 1998. A major conference on thematter is scheduled to be held in April 1998 inBirmingham, under the joint sponsorship of theBritish Presidency and the Commission.

V.4 Conclusions

This Green Paper analyses the convergencephenomenon and its implications for the existingregulatory frameworks governing the

telecommunications, media and informationtechnology sectors.

The implications of these developments are farreaching. Convergence is not just abouttechnology. It is about services and about newways of doing business and of interacting withsociety. The changes described in this GreenPaper have the potential to improve substantiallythe quality of life for Europe’s citizens; tointegrate Europe’s regions better into the heart ofthe European economy, and to make businessesmore effective and competitive on global andnational markets.

The emergence of new services and thedevelopment of existing services are expected toexpand the overall information market, providingnew routes to the citizen and building on Europe’srich cultural heritage, its potential for innovationand its creative ambitions.

The global nature of communications platformstoday, particularly, the Internet, are providing akey which opens the door to the furtherintegration of the World economy. At the sametime, the low cost of establishing a presence onthe World Wide Web, is making it possible forbusinesses of all sizes to develop a regional andglobal reach. Globalisation will be key theme infuture developments, as changes in Europe aremirrored by developments all over the World.

If Europe can embrace these changes by creatingan environment which supports rather than holdsback the process of change we will have createda powerful motor for job creation and growth,increasing consumer choice and promotingcultural diversity. If Europe fails to do so, or failsto do so rapidly enough, there are real risks thatour businesses and citizens will be left to travel inthe slow lane of an information revolution which isbeing embraced by businesses, users and byGovernments around the World.

The issue involved are complex and will requiremuch discussion before any new Communityinitiatives can be proposed. The Green Paper isintended to launch such a discussion and allinterested parties are invited to participate. It ishoped that this discussion will be profound and farreaching. The results of this public consultationwill be reported in a Commission Communicationin June 1998.

This Green Paper represents a step on the way tosecuring the benefits of convergence for Europeansocial and economic development. The JuneCommunication will allow political positions to betaken by the European Parliament, the Council ofMinisters, the Economic and Social Committeeand the Committee of the Regions, and for clearobjectives for future policy to be established.

36

This Green Paper initiates a new phase in theEuropean Union’s policy approach to thecommunications environment. As such itrepresents a key element of the overall frameworkput in place to support the development of anInformation Society. It builds on the currentstrengths of the frameworks fortelecommunications (launched by the landmark1987 Green Paper on telecommunication66) andfor media (established by various Communitylegislative initiatives), and offers all interestedparties an opportunity to comment on the futureshape of regulation, in the post-1998communications environment, in the sectorsaffected by convergence.

This first step is intended to pave the way for thedevelopment of an appropriate regulatoryenvironment which will facilitate the fullachievement of the opportunities offered by theInformation Society, in the interests of Europeand it’s citizens as the 21st century begins.

66 COM(87) 290 final

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ANNEXExisting Regulation

This annex describes existing the regulatoryenvironments in the European Union fortelecommunications and media sectors. Theabsence of regulation in the IT field is also noted.

Telecommunications regulation is gearing upfor full liberalisation

A clear framework for effective competitionthroughout the European Community has nowbeen put in place and is at an advanced stage ofimplementation in national law as the 1998deadline approaches. In reality the transition frommonopoly to effective competition has required aprofound reform of regulation in thetelecommunications sector, with rules agreed toset the dates for liberalisation of the sector and toprovide a common regulatory framework covering,inter alia:

– conditions for market entry (e.g. commonframework for licensing - procedures,timetable and conditions which may beattached)

– maintenance of public interest (e.g. aframework guaranteeing the delivery ofuniversal service and specifying consumerrights in relation, for example, to the voicetelephony service; and rules covering dataprotection and privacy);

– interconnection and interoperability ofservices and networks, and fair allocationof resources (e.g. access to numbers,availability of radio-frequency spectrum)

A fundamental consideration has been the needto limit regulation to the minimum required tosecure the overall public interest and to enableeffective entry and sustainable competition.

The focus of the regulatory framework fortelecommunications has been on networks andservice provision (including aspects linked tosafeguarding the public interest) and not on theregulation of content carried over those networks.Three aspects of this focus on an internal marketfor telecommunications can be highlighted:

– the removal of barriers to investment andinnovation within the internal market;

– ensuring conditions that support pan-European networks and services;

– maintaining a defined level of service forusers

The WTO/GATS agreement on basictelecommunications reached on 15 February1997 is fully in line with the EC regulatory

framework for the sector. This applies not only tothe dates set for liberalisation, but also withregard to the underlying regulatory principles.The deal does not cover broadcasting and it onlyapplied to telecommunications (transport)services. Thus it does not cover any “contentservices67” which may be transmitted throughtelecommunications services. .

Audiovisual regulation

At a Community level, current audiovisualregulation aims to achieve the free circulation ofservices in accordance with Article 59 of theTreaty. It is an example of the application ofsubsidiarity whereby Community legislation hasbeen adopted solely when absolutely necessaryto achieve the aforementioned Treaty objective.National rules have been co-ordinated to thedegree necessary to remove barriers resultingfrom disparities between these regulations, whensuch rules are justified for legitimate publicinterest reasons.

Historically, the Court of Justice has recognisedthat in the absence of harmonisation at aCommunity level, Member States could imposetheir national rules on service providers from otherMember States, where those rules pursued ageneral interest objective and were proportional toachieving that objective.68 This case law led tothe adoption of the main Community instrument inthis area, the so-called Television WithoutFrontiers Directive (TVWF) which co-ordinatesnational regulations in a number of fields relatingto the provision of broadcast services (jurisdictioncriteria, advertising, sponsorship, tele-shopping,protection of minors, public order, right of reply,promotion of European programmes).

This Directive is based on the principle of “homecountry” control, i.e. control by the authorities inthe country of origin under whose jurisdiction thebroadcaster falls. It has proved its effectivenessin the current broadcasting environment.69. A

67 The EC GATS commitments on basic

telecommunications services exclude the economicactivity consisting of content provision which requiretelecommunications services for its transport, suchcontent provision being subject to the specificcommitments undertaken by the EC in other relevantsectors. The EC has not undertaken any GATScommitments on audiovisual/broadcasting services.There are also some exemptions to the MFN (Most-Favoured-Nation) principle in audiovisual services inorder to protect cultural values.

68 Case n° C52/79 of 18/3/80 Procureur du Roi v. MarcJ.V.C. Debauve

69 See “Second Report on the Application of Directive89/552/EEC” COM(97)523 final of 24/10/1997

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Directive70 amending the original 1989 text wasrecently adopted in order to adapt the legalframework to change within the audiovisuallandscape. The new Directive must betransposed by the end of 1998; the Commissionwill ensure that this process is rigorously broughtto fruition.

The Directive leaves certain matters to theMember States, one of which is licensing. It wasnot considered that differences in these areaswould create obstacles to the functioning of theInternal Market, i.e. to the free movement oftelevision broadcasts. The Member States arerequired to ensure that broadcasters within theirjurisdiction meet the minimal rules laid down inthe Directive, but [in accordance with Article189(3) of the Treaty] may decide how suchobligations are to be implemented at nationallevel.

Two further initiatives have been taken, in partwith the purpose of supplementing the TVWFDirective in creating the legal framework for the‘European audiovisual area’. In 1993, the Counciladopted a directive on the co-ordination of certainrules concerning copyright and rights related tocopyright, applicable to satellite broadcasting andcable retransmission.71 More recently, theCommission has proposed a directive on the legalprotection of conditional access services.72

Apart from the above-mentioned Communityinitiatives, audiovisual regulation is largelynational in scope. The typology of regulation ofaudiovisual services is generally either positive(an obligation to fulfil e.g. provide a balancedrange of programming) or negative (regulation tolimit certain types of materiel e.g. incitement toracial hatred). Positive obligations are often metin practice, to varying degrees from one MemberState to another, by broadcasters vested with apublic service mission. Existing regulation isbased in part on the widespread availability oftelevision (its “pervasiveness”). It is clear thatregulation must meet a proportionality test, and ina digital age it should and indeed is alreadyevolving. This means that a lighter regulatorytouch could be appropriate as a function of thenature of the service (e.g. satellite or cable pay-per-view is generally more lightly regulated thanterrestrial free-to-air television, arguably the mostpervasive of all media).

70 Directive 97/36/EC amending Directive 89/552/EEC, the

‘Television without Frontiers’ Directive, 30.06.1997, JOL 202, 30.07.97, p.60.

71 Directive 93/83/EEC, OJ L248, 6.10.9372 COM(97) 356 final of 9.7.1997

Publishing and IT

The publishing sector operates within a frameworkof more limited sector-specific regulationcompared to telecommunications andaudiovisual/broadcasting sectors, and there arefewer regulatory barriers to entry (in the sense offormal licensing requirements), although there arestringent rules applying to this sector.

At the same time, a range of controls areapplicable to the broadcast media (for example,those relating to pluralism, foreign ownership andright-of-reply) also apply in some form to thepublishing sector (and, in particular, the press),reflecting public interest objectives common toboth sectors. However, the implementation ofsome of those principles for the publishing sectoris through self-regulatory bodies, such as Pressor Industry Councils or Codes of Practice, incontrast to the stronger powers for regulatoryintervention in the broadcasting field. In additionmany of the general rules related to publicmorals, advertising, libel, privacy, intellectualproperty protection, access to public documents,also apply to the publishing sector.

The Information Technology and softwareindustries have even less of a tradition of sector-specific regulation, though once again horizontalrules relating to issues such as export controls,electro-magnetic interference; or consumerprotection would apply, as would generalcompetition law.

The Internet is more closely associated with ITand software industries than withtelecommunications whose infrastructure itsuses. Whilst the network over which much of theInternet traffic flows is subject to detailedregulation; the organisation, management andallocation of resources within the Internet hasbeen largely industry and user-led. TheCommunity has actively supported an industry-ledapproach in its work on harmful and illegalcontent on the Internet, and more generally in themedia.73

Whilst approaches may be changing, particularlyin key areas such as naming and addressing,there has been little sector-specific regulation ofthe Internet in Europe.74

73 Op cit. note 28 see Green Paper on the protection of

minors and human dignity in audiovisual andinformation services, COM (96) 483, 16.10.97 andCommunication on the illegal and Harmful content onthe Internet, COM(96) 487, 16.10.97.

74 This contrasts with the approach in Singapore,Vietnam, or China, where restrictions have been put inplace.

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