This Green Paper represents a further step in the realisation of an Information Society in Europe. It examines a key set of policy issues relating to the broad infrastructure of telecommunications, media and information technology sectors, for convenience referred to as the `relevant' sectors in much of this document.
The Green Paper does not examine policy issues related to the wider set of services which will make the Information Society a reality - services such as Electronic Commerce, which encompasses a range of activities having the potential to revolutionise sectors as diverse as retailing, travel and financial services. The policy issues relating to this wider set of services include those where Community action is already well advanced, for example, in intellectual property rights, copyright and related rights; media pluralism; privacy and data protection; encryption and digital signatures. These are part of the broader framework which is emerging for new services and activities within the Information Society. They are therefore regarded as outside the scope of the Green Paper and are given only passing reference where relevant to the issues at hand.
Instead, the Green Paper concentrates on the underlying infrastructure which will helps create and deliver the services of the Information Society to customers. It is made up of the systems of components, networks and services associated with the relevant sectors. In all three sectors, those systems are undergoing fundamental change, primarily through the application of digital technology. This is likely to have consequences for policy and regulation.
The Paper focuses on the on-line delivery of services, dealing with off-line publishing, for example, only insofar as it represents a potential market for the on-line business.
The Green Paper deals with broad future trends and does not attempt to define markets for the purposes of the application of Community competition law. The positions discussed in this Green Paper cannot prejudge the positions the Commission may take in the assessment of pending or future cases under the competition rules.
From this perspective, Chapter I describes the convergence phenomenon and the technological developments which underpin it. It also identifies current developments in the market - and how suppliers, service providers and consumers are reacting to them - as indicative of the possible direction of future change. As in any consideration of new markets, the activities of suppliers and service providers give the first indication of how things might develop. Their reactions are tempered by those of consumers, who must accept and embrace the new services before the markets can become a reality.
The
term convergence eludes precise definition, but it is most commonly expressed
as:
- the ability of different network platforms to carry essentially similar kinds
of services, or
- the coming together of consumer devices such as the telephone, television and
personal computer.
This latter expression of convergence is one most often cited in the popular
press - it is easily understood by consumers and has the added interest of
reflecting a wider struggle between computer, telecommunications and
broadcasting industries for the control of future markets.
Despite this popular image however, any convergence of consumer devices is today much less real than network convergence. Telecommunications operators are already offering audiovisual programming over their networks (albeit on an experimental basis) and have become major players in the provision of Internet access, as well as backbone infrastructure. Broadcasters have provided data services over their networks for some years and these services will be enhanced over the next 12-18 months by the prospect of digital transmission of both radio and television, and by the addition of interactivity.
Cable operators are providing a range of telecommunications services, including voice telephony in some Member States and are starting to deploy cable modems to offer high speed Internet access, in addition to their traditional business of television programming distribution. Beyond the provision of services to the public, both audio and video technologies are also starting to be deployed within corporate `intranets' as an additional medium for distributing real-time information. Such applications are also starting to appear on web sites targeted at prospective customers. [5]
The network platform and the consumer/user environment constitute two elements of the supply or value chain extending from content creation through content packaging, service provision and final delivery to customers (see Fig.1). The value chain is a useful concept for analysing the behaviour of firms and markets in the light of convergence.
Fig.1: The emerging value chain
Source: Squires Sanders Dempsey LLP and Analysys Ltd.
Today, firms tend to be present in one or more elements of the value chain. Some argue that a shift towards convergence will lead many of today's current players to consider extending their activities beyond their core businesses, and argue that this trend is already visible in some recent mergers and acquisitions (see below).
The potential for change as a result of the phenomenon of convergence can be seen at three different levels (technology, industry, services and markets) (see Fig 2) though there can be no automatic assumption that convergence at one level inevitably leads to the same degree of convergence at other levels, nor that convergence in technologies, industries, services or markets will necessarily lead to a need for a uniform regulatory environment.
Technology convergence, of which the examples cited above are illustrative, is based on the common application of digital technologies to systems and networks associated with the delivery of services. As section I.2 demonstrates, technological convergence is already happening, and continuing advances in technology will further consolidate the process along the different elements of the value chain.
Many commentators identify a trend towards industry convergence, seen in
alliances, mergers and joint ventures which build upon the technical and
commercial know-how of the partners in order to exploit existing and new
markets. Such alliances, mergers and joint ventures will continue to be
subject to scrutiny under the Community competition rules. Many such alliances
are `horizontal', that is, between firms operating in the same part of the
value chain. Those aimed at addressing the potential opportunities offered by
market convergence generally involve companies operating 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 the risks involved.
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| Fig.2: The stages of convergence |
It is also difficult to be precise about the services arising from convergence. Many new services will result from technological progress within given sectors, and may not result from cross-sectoral activity at all. Others will be a direct result of cross-fertilisation between sectors, telecommunications and broadcasting for example. Where there is a suggestion of the latter, the term "convergent services" will be used in this document. Where a more general reference is appropriate, the Paper will simply refer to the term "new services", without signifying any precise legal definition.
This Green Paper is not primarily concerned with technology; rather it addresses the new business and market phenomena which are being enabled by technological developments, and which are altering traditional provider-consumer relationships. An understanding of the nature of these developments can lead to a better appreciation of the potential for change.
As already stated, the underlying trend is the common adoption of digital technologies by the relevant sectors. Digital technologies cover a range of disciplines generally associated with the computer and telecommunications industries - digital micro-electronics, software and digital transmission. Applied piecemeal within each of the relevant sectors, these technologies have already demonstrated their greater efficiency, flexibility and cost-effectiveness, and have shown how they can enhance creative potential and promote innovation.
Computer technology now plays a key role in content creation and production in both cinema and broadcasting worlds. The ways in which audio-visual material is produced, delivered and consumed are evolving. Content is becoming "scaleable" so that it can be used in different environments and delivered on different network infrastructures. The basic building block is the MPEG family of standards for the digital encoding of moving images.[6] Once encoded in this format, images may be modified, manipulated, or transmitted in the same way as any other digital information. The systems and networks handling such information are of course indifferent to the nature of the source material, be it image, sound or text. Digital source encoding thus forms the basis of technological convergence.
Digital transmission may be carried over broadcast networks or over terrestrial wired or wireless infrastructure. When applied to broadcasting networks, the most significant impact of digitalisation is the immediate expansion of capacity, effectively removing a scarcity which has limited growth of the sector since its inception. But processing power and software are also helping generalise consumer devices like the set-top box. Implementing functionality in software helps overcome the product life-cycle problems associated with hardware, reducing market inertia and facilitating innovation. It also gives such devices a level of intelligence which allows broadcasting networks to emulate the switching capabilities normally associated with telecommunications. For example, satellite pay-television operators can today address individual customers through conditional access systems, often combined with the terrestrial telecommunications network to provide a `hybrid' return path for interactive services.
As alternative telecommunications infrastructures become more widespread, high-speed networks based on optical fibres will soon be capable, in combination with modern server technology, of operating cost-effectively in a virtual broadcast mode.[7] The high data rates and spectral efficiency achievable through digital transmission open up the possibility of delivering high-quality audio and video signals over a variety of different network infrastructures. Transmission technologies such as narrow-band ISDN[8], xDSL[9] and ATM[10] will ensure that both existing and new infrastructures can play a role in carrying the new services. The capabilities of existing networks are also enhanced by the compression techniques implicit in the MPEG standards, allowing networks of limited transmission capacity to carry services previously considered possible only on sophisticated and more costly wide-band infrastructures.
ATM is of considerable interest as a multimedia transport technology. It is a high-speed cell-relay technology, capable of transporting telecommunications traffic of different characteristics (voice, data, video) over the same network, and has been designated by the ITU as the basis for broadband ISDN, the successor generation of its narrow-band counterpart.
This continuing competition between different technologies can change the fortunes of one approach or another, making it difficult to be prescriptive about tomorrow's network architectures. This may be a relatively minor problem given that today's applications and services are becoming increasingly independent of the underlying infrastructure which carries them.
The most relevant example of such platform independence is that of the Internet Protocol (IP). IP has developed into the de facto network protocol for the Internet, able to route and transport all the elements of a multimedia service (text, image, motion video and sound). IP is also used in Intranet products, providing an infrastructure for multimedia applications within a company or other closed user group.
The Internet can best be described as a network of networks interconnected on an open basis using IP, usually running over transmission links leased from telecommunications operators (TOs). It has evolved very rapidly over the past decade from a largely academic- and government-sponsored network with a backbone capacity of 56kbit/s in 1986, increased to 45 Mbit/s in 1993, and to 155Mbit/s in 1996. This huge change in the capacity of the Internet's infrastructure has been in response to the remarkable growth in the number of people using the Internet and the range of applications and software tools developed for it.
The open, non-proprietary approach to standards for the Internet has made it easy for companies to take advantage of, and build on, the advances made by others in the industry. For example, many would argue that the rapid development of the capabilities of the World-Wide Web (WWW) has been enhanced by the open approach to browser development taken by vendors such as Netscape, Microsoft and Sun. The Internet will be further enhanced as a vehicle for multimedia transport by the development of several improved or new protocols which Internet service providers expect to implement within the next three years.
This brief review of the salient technological developments is not meant to be exhaustive, but to illustrate the role of technology as the motor of change. Technology is developing constantly; its application to innovative services and the bringing of those services to market promise even further dramatic change in the future.
Significant changes are now being realised through the application of new technology to the individual sectors, and these are examined in turn. Such changes are not in themselves evidence of convergence, but as suggested earlier, the commonality of technology applied could provide a basis for that convergence to develop.
In the early 1990s it became apparent that digital technology could be efficiently and cost effectively used for the delivery of television and audio signals. Of particular interest was the possibility of delivering many more channels over the same infrastructure (cable TV, satellite transponders, terrestrial spectrum) by using digital compression rather than existing analogue transmission.
In the television area, building on the work of the Digital Video Broadcasting (DVB) project,[11] and against the background of a regulatory framework provided by the Television without Frontiers Directive, the Television Standards Directive and other measures,[12] digital TV services have recently been launched in Europe. Other countries around the world are also making use of DVB technology and European standards. The first commercial services started in France in April 1996. Other digital services rapidly followed and at the time of writing, more than 200 digital TV channels are targeted at viewers in France, Germany, Spain, Italy, the Benelux and the Nordic area. Of the order of one million digital receivers are believed to be currently in operation in Europe - figures which could double by the end of 1998.
Although it is early days in the development of this market a number of interesting phenomena - which are either new to TV or significant developments of past practice - are appearing as digital compression is cost-effectively reducing capacity constraints:
These phenomena, which constitute a significant departure from classic schedule-based broadcasting, have the potential to improve consumer choice. In addition, and because the "digital channel" is inherently more flexible than an analogue channel, it can deliver other services in the form of data, graphics, moving pictures or combinations of these. Digital television shares these characteristics with digital audio broadcasting, which also offers listeners near CD quality sound. "Multimedia data broadcasting" already provides for the downloading of computer programmes including video games, data files and direct access to the Internet from the TV set or network computer.
Example: Hughes Olivetti Telecom launched the DirecPC satellite Internet access service in 1996. It connects some 2000 sites across Europe to the Internet at speeds up to 20 times greater than conventional modems.
The arrival of digital radio offers exciting possibilities for the combination of radio and images, or links to Internet sites marketing CDs or tickets for band being broadcast[13]. Broadcasters such as CNN and the BBC are starting to make parts of their broadcast content available on the Internet, extending their normal geographical reach, whilst a new breed of webcasters is emerging to broadcast particular live events, such as sports coverage, concerts, major events, etc..
Example: Coverage of the recent Irish elections was available to Irish citizens all over the world via a webcast site (www.itv.com)
Other innovations in the broadcasting field include Widescreen TV using 16:9 format, the technical possibility of higher definition pictures.
In less than ten years, the European telecommunications sector has experienced a radical transformation from one characterised by rigid and inefficient monopoly to a sector facing full and vigorous competition, with the total liberalisation of services and infrastructure due to take place in most Member States from January 1998. This transformation owes its beginnings in part to an earlier phase of convergence - that between telecommunications and computing - over a decade ago. Technological convergence rapidly gave rise to market convergence, and to "value-added" services - innovative services which borrowed concepts from both sectors, and which allowed businesses to extend the power of computing beyond the geographical confines of their immediate locations.
The regulatory traditions of the telecommunications sector contrasted sharply with the free-market environment in which the computing industry had developed, and their coming together meant that some rationalisation of these different regulatory philosophies would be needed if the new services were to flourish. The 1987 Green Paper[14] concluded that greater harmonisation and gradual market opening in telecommunications would provide the most fertile environment for such growth. The first measures were initiated in 1988 and culminated in the introduction of full liberalisation of the telecommunications sector by 1 January 1998[15] This step-by-step process of telecommunications liberalisation and global market opening is already bringing substantial benefits to many businesses and consumers, with lower prices, improved customer service and innovative service offerings. Even so, the overall level and structure of prices continue to have a major impact on the take-up of new services.
The mobile communications business is particularly dynamic.
Example: Close to one in three people in Scandinavia have a mobile phone and there are more than 37 million mobile telephony users in Europe.
Increasingly, such mobile systems are adding a multimedia component. One aspect of market convergence occurring within the telecommunications sector is that between fixed and mobile telephony, as in certain Member States and amongst certain groups of the population (e.g. students, small businesses), mobile phones are replacing fixed connections.
However, this practical example of how fixed and mobile networks are converging is only part of a wider trend towards the full integration of wired and wireless technologies, which is the key goal of the next generation of digital mobile communications systems. This will offer users a platform on which to receive a seamless set of voice, data, multimedia and audio-visual services wherever they are. This vision, which has important implications for all the sectors affected by convergence was first recognised in the 1994 Mobile Green Paper[16] and has most recently been returned to in the Commission's two Communications on Universal Mobile Communications[17].
It is, however, in a third sector, the Internet, that changes have been the most radical. The Internet is both the symbolic and prime driver of convergence. It is a vehicle for the delivery to users of both existing services (electronic mail, video, sound, voice telephony, for example) and completely new services (e.g. World-wide Web). It has rapidly evolved from a government/ academic network to a powerful communication and trading platform. Characterised by an unprecedented growth rate (doubling its number of users every year), the Internet has started to influence a number of economic sectors, with the emergence of a fast-growing electronic-commerce economy.
The Internet is displacing traditional computer networks, and showing the first signs of how it may provide a platform which over time replaces traditional methods of trading. For example, traditional business-to-business trading on closed corporate networks is giving way to multidimensional commerce on global open networks. The Internet is also providing an alternative means of offering the core telecommunications business activity (even if differences in quality still distinguish the two services) through the delivery of Internet telephony, without in some cases either party needing to have a computer. The Internet is also a significant platform for broadcasting services.
Example: Today, there are 650 Webcast radio stations and 270 "Real-Video" enabled sites on the Internet,[18] offering video material of current European and US broadcasters.
New Internet techniques, such as multicasting, offers the possibility of delivering audio and visual content to up to 50,000 users at any one time instead of 50,000 individual messages, narrowing the borderlines between previously separate sectors. Many consider that Internet will become a major conduit for video and sound (especially music) distribution.
However, the Internet as a platform has developed differently from traditional broadcasting and telecommunications. It has been essentially user-driven, with user-owned equipment (the routers performing central rather than peripheral network functions) and users themselves continuing to generate a substantial part of the content. The decentralised nature of Internet is seen by many as the single main reason for its success, and as a lesson for the converging environment. A characteristic of the Internet which is indicative of convergence is that it functions simultaneously as a medium for publishing and communication. Unlike traditional media, the Internet simultaneously supports a variety of communication modes, both transactional and broadcast in nature: one-to-one, one-to-many, many-to-many. An Internet user may "speak" or "listen" interchangeably, interweaving public communication (the content of which is - at least in the case of broadcast content - traditionally regulated) with private communication (traditionally unregulated). This constant shift from publishing to private communication modes, each regulated through very different principles, constitutes one of the main challenges of Internet regulation.
The on-going process of convergence, the opening up of the telecommunications sector to full competition both in Europe and globally, and the rapid growth of the Internet and on-line services, is leading to the creation of new market structures and new roles for market players. In 1996 more than 15% of the total value of world-wide mergers and acquisitions (US $1 trillion) was generated by activity in what can broadly be termed information and communication industries. Such ventures represent a wide-range of transactions, from horizontal alliances which share risk and match complimentary skills, to vertical integration as players in one market segment seek to leverage technological convergence, expand into other higher value segments or develop scale economies. One study being carried out for the European Commission interpreted the motivations behind some the main types of transactions (not all successfully concluded), shown in Tables 1 and 2 below. [19] Although they do not necessarily reflect the views of the Commission and cannot be considered as an assessment under the Community competition rules, they are nonetheless useful illustrative pointers to the evolving market situation.
Table 1: Horizontal Mergers and Alliances
| Rationale | Examples |
| Increasing market power/gaining minimum efficient scale | Vebacom - Urbana Systemtechnik, Cable and Wireless Communications, Demon - Cityscape |
| High cost of new (digital) technologies | Canal Plus - Nethold |
| Uncertain demand for new services | Multimediabetriebsgesellschaft (Kirch, Bertelsmann, etc.) |
| Internationalisation | BT-MCI, Global One, UUNet - Unipalm Pipex |
| Opportunities arising from regulatory reform | MFS/Worldcom, Telenet Flanders, NYNEX/Bell Atlantic |
| Rationale | Examples |
| Uncertainty of demand | Hughes Olivetti Telecom (DirecPC), @Home |
| Market positioning and access to new skills | Bertelsmann - AOL, BBC WorldWide - ICL, STET - IBM |
| Gaining control of channels to the customer | BT - BSkyB, Disney - ABC - Capital Cities |
| Moving into higher margin areas of the value chain | Microsoft Network - NBC (MSNBC Internet new channel) |
| Stave off competition from companies in related markets | US West - Time Warner, Oracle - Sun - Netscape (Network Computer) |
The same Study concludes that two trends can be identified in such activity.
One towards consolidation of current activities and the other towards
diversification in response to new opportunities opened up by liberalisation of
EU and World markets, and with a view to the opportunities offered by
convergence. Vertical merger activity is seen as more significant
indicator of a change in industry structures in response to the convergence
phenomenon.
Underlying that analysis is the reality that few, if any of today's market players will have the skills or resources to straddle the whole of the value chain within a converged environment, so that the emergence of major players in the sectors affected by convergence will inevitably rely on partnering to varying degrees. In such a context, the Competition rules will continue to play a key role in assessing new ventures as the emerge.
In the past, the Commission has applied the Community competition rules to convergence cases,[20] including some of the cases mentioned in the table above. Global One and BT/MCI are examples of the cases where the Commission, following changes to the arrangements to protect competition, has been able to approve under the competition rules agreements considered likely to promote technical progress. However, the Commission has taken action against other arrangements which unduly foreclosed markets and which were therefore incompatible with Community competition rules. Notable amongst these were the MSG and Nordic Satellite Distribution operations, where the combination of market players in the converging markets and the market positions which they were likely to hold in the future would have led to a foreclosure of the market on a lasting basis. This would have, in turn, been likely to result into excessive pricing as well as a loss of innovation and product variety, to the detriment of the fast development of these markets in Europe. As this could not be remedied with changes to the arrangements, therefore the agreements were prohibited.
In the future, the Commission will continue to favour agreements which promote technical progress, and which promote market entry. On the other hand, the Commission will not allow agreements or mergers which have the effect of foreclosing markets or strengthening or creating dominant positions, or giving the parties the possibility of denying access to new entrants. The Commission will also prevent market actors who enjoy an existing dominant position from abusing that dominant position, such as it did in the Microsoft case, or in the case of telecommunications operators on liberalised markets.
This chapter has attempted to define the phenomenon of convergence between telecommunications, media and IT sectors. It described the enabling technologies of convergence and its initial manifestation in the network platforms associated with the on-line distribution and delivery of services. The chapter concluded that while there is general agreement on the notion of technological convergence, there is less certainty regarding the likelihood and/or timing of a full convergence of the services and markets.
Chapter I highlights the nature of the convergence phenomenon, the
technological and market developments and the underlying political stakes for
Europe.
(A) Whilst convergence is occurring at the technology level, to what extent and
at what speed is this happening at the industry, service and market levels?
(B) Are the effects of convergence already being felt in the business world and
in our everyday lives, and if so, in what way?