Following a discussion of the social and economic context for convergence, Chapter II examines market trends in order to assess the potential impact of convergence on the relevant sectors. The chapter concludes with a discussion of how consumers may be responding to these developments.
The concept of the Information Society provides the political background for convergence. The Information Society permeates current thinking on future economic development and is predicted to have an equivalent impact on society and employment as the industrial revolution did a century before.
Within this context, the new services and activities made possible through the range of technological and market trends identified above have the potential to impact every aspect of our lives, from our homes to our work place; from the way we do business to the way we learn; from access to healthcare to the management and delivery of public services and to the way citizens participate in a democratic society. Today people are already using telephone-based services in some Member States in areas such as banking, insurance and ordering of computers or theatre tickets. It is only a relatively short step before the delivery of such services becomes common place over the television or via a PC. A key issue in that context is ensuring that users are familiar with and comfortable using new technologies and services, whilst as will be seen later the regulatory framework has a role to play in ensuring user confidence in the new environment.
A range of Community initiatives have attempted to give a concrete form to the impact of the social and societal implications of the Information Society following the landmark White Paper in 1993,[21] and the Bangemann Report published the following year.[22] Similar high-profile initiatives were undertaken at the same time in the USA and other parts of the world, and an international dimension was added in 1995 when the G7 countries met in Brussels to devise a global strategy for developing towards the Information society.
Broad social aspects are being addressed by a number of initiatives in which the Commission is involved. These include the Information Society Forum,[23] the High-Level Group of Experts on the social aspects of the Information Society,[24] the Commission White Paper on Teaching and Learning, [25] the Green Paper on Living and Working in the Information Society[26], and a reconvened Bangemann Group reviewing progress since its 1994 report. At an early stage, the Commission recognised the importance of convergence for the European audiovisual programme industry, a prime vector of social and cultural values.[27] Two recent Commission documents, one a Green Paper and the other a Communication, addressed issues of illegal content and content which could be damaging to minors. [28] The European Parliament[29] and the Council[30] have been active in this area, and a recently-adopted Communication describes how the Information Society must transcend a wide range of EU policies.[31]
The many initiatives now under way in furtherance of the Information Society are being pulled together in a Rolling Action Plan[32] which constitutes the second phase of the Commission's response to the Bangemann Report. The first phase covered the regulatory framework, the network, services and content aspects, and the social and cultural issues.[33] The second phase, an outcome of the Corfu summit,[34],[35] is based on a updated set of priorities: the business environment, education and training, protection of the public interest, and the international dimension.
The convergence debate which this Green Paper raises, is much more than an academic or theoretical exercise. The ability of the European Community to use convergence, whilst tailoring it to the European version of an Information Society, will be at the heart of growth, competitiveness and job creation in the years to come. The danger is that if Europe fails to take advantage of the opportunities provided by convergence, it could be left behind as other major trading blocks reap the benefits of a more positive approach.
The socio-economic and business implications of the Information Society are currently being studied in different fora at a Community level.[36] The impact of the new services resulting from convergence will be felt in the economy as a whole as well as in the relevant sectors themselves.
The most significant example is the emerging field of electronic commerce. It includes both indirect (electronic ordering of tangible goods), and direct (on-line ordering and delivery of services) forms. Electronic commerce makes it possible to trade at low cost across regions and national frontiers.
A recent Commission Communication pointed to the potential opportunities provided by Electronic Commerce for consumers and for businesses in Europe, particularly for SMEs.[37] It estimated that electronic commerce revenues, both direct and indirect, are set to increase to 200 billion ECU world-wide by the year 2000. It also highlighted the creation of a favourable regulatory framework on both EU and global levels as a prerequisite for further development.
With regard to the impact of convergence on its component sectors, one study indicated that revenues in the relevant sectors could suffer by some 40% by the year 2005 if the market does not develop in a direction which takes full advantage of convergence.[38] To give some idea of scale, Fig. 3 shows that the relevant sectors represented some ECU 1750 billion in 1996, of which ECU 508 billion was attributed to EU markets.[39]
Fig.3: 1996 distribution of global revenues (ECU 1750 billion) for the
relevant sectors
(SourceIDATE)
Expansion of the market for services and the means of their distribution seems likely to have a knock-on effect in content production, though often as a result of regulatory obligations placed on particular broadcasters. There is evidence, for example, that the success of Canal+ pay television in France has had a positive impact on the French cinema industry. Likewise, independent content producers in the UK were given a boost when Channel 4 arrived on the scene.
Future developments may impact on the fulfilment of the public service mission. First, as the pay-TV market matures, operators may need to increase their investment in local content to maintain quality and product differentiation. For example, British satellite pay-TV operator, BSkyB, is now a major investor in the UK film industry, and Canal+ is acquiring rights in French cinema libraries. Secondly, competition in conveyance (terrestrial, cable, satellite, etc.) is likely, particularly in a digital environment, to shift the bottleneck from delivery to content, with a resulting hike in the prices for content rights.
Employment effects
The signals this sends to the marketplace should lead to greater investment and hence employment in the content business to satisfy the increasing demand. Europe is well-placed to meet this challenge by harnessing its creative capacities to the diversity of cultural environments under its roof. However, EU production is not increasing rapidly and the EU therefore needs to strengthen the competitiveness of its companies so that the public can get the most out of the opportunities offered by the new media, and so that market growth can be transformed into jobs to bring the number of people employed in the industry in Europe (1.8 million) closer to the level in the United States (2.6 million).
Quite apart from the multiplier effects generated by convergence in its role as an enabler of the Information Society, there is likely to be a direct and positive impact on employment in the relevant sectors. Expansion of the market and the attendant demand for new content and services will generate a need for people with the requisite creative talents. This will be felt both in large companies seeking to reorient themselves towards the new markets, and in SMEs seeking to exploit niche markets. SMEs will combine their use of standardised digital platforms such as the Internet with software skills to develop applications and services aimed at both professional users and residential consumers. The task will be to take full advantage of technological convergence by integrating the diverse components of telecommunications, media and IT sectors to produce innovative services.
Staff retraining will be an important requirement, Gearing up for the new markets will need people with the right mix of skills, for which specialised training will be required. The Commission has launched a number of initiatives in the field of education and training, notably the action plan, Teaching and Learning in the Information Society,[40] as well as certain activities in the context of the Leonardo (training) and Socrates (education) programmes.
Research and Development
European support for co-operative research and development activity, through the ACTS (Advanced Communications Technologies and Services), Esprit and Telematics programmes, has played an important part in many of the technical developments which has made the convergence phenomenon possible. It has contributed to the strength of European IT, telecommunications and software industries. Much of this work has supported the development of technical standards subsequently adopted by the industry and formalised by European standardisation bodies, and has contributed to the development of technical platforms and tools supporting electronic commerce.
Research and Technological Development (RTD) Programme activities during the Fourth Framework Programme have equally encouraged greater participation by SMEs, who can benefit, for example, from systems and services which stimulate tele-working. A specific example of an integrated approach to systems and services of benefit to SMEs is the Integrated Applications for Digital Sites.[41] Here, on-line and off-line multimedia applications supply integrated services from central/local government - in transport management, tele-medicine, education and training - to local citizens, businesses and other organisations in a cost-effective, user-friendly manner.
Following the adoption of the proposal for the Fifth Framework Programme in April 1997, the Commission has reviewed research activities in IT, telecommunications and telematics with a view to grouping them into a single integrated programme. In the context of convergence, this includes R&D activity in the area of multimedia and audiovisual content.[42]
This section looks at market trends without however providing an assessment under the Community competition rules. The activities and investment strategies of market players in response to new developments are now becoming evident, and give a good indication of how those players perceive future trends. One indicator of convergence is the willingness of market players to exploit the possibilities provided by new platforms, in particularly, the Internet to expand their activities beyond the confines of their traditional core markets in both a geographical and product sense. Webcasting highlighted above is one such example. The entry of telecoms operators into the area of Internet service provision and Internet voice telephony provision is arguably another. Such services are new only in the sense that they represent an excursion into new areas for the provider in question. But some are new to all-comers.
The flexibility of digital information is creating the possibility for more and enriched conventional services, (such as digital television and radio and better quality mobile communications), as well as a whole range of new services and applications. These new services are as varied as electronic newspapers. on-line supermarkets and catalogues, home-banking, and the use of multimedia web sites for both internal communications, and as a key tool for business.
Examples:
Despite current limitations a number of applications are closing the gap between smart television and video Internet. The area where these two areas converge currently constitutes the most fertile ground for innovation and entrepreneurial activity - as well as for creation of entirely new types of content. Innovative forms of graphic-rich "Internet channels" are building on the creativity of previously separate métiers of video production, computer imaging and information management. Similarly, high-end networked video-games are building devoted constituencies of players across national borders. In a seamless and scaleable digital environment, innovative hybrid multimedia applications are appearing - such as digital television `infomercials' with Internet response mechanisms (for immediate ordering), CD-ROM catalogues with Internet connections (for content or price updates) and commercial Web sites with local CD-ROM extensions (for memory-intensive multimedia demonstrations).
At the delivery end of the value chain, players are moving into what are for them new areas of activity. New features are being added to services on all networks. In addition, the services themselves are changing by combining the features of hitherto separate services. Thus television programmes are `data-enhanced' by the parallel availability of text and graphics. One pilot project, for example, supplements broadcasts of horse-races with supporting text and facilities for on-line betting. The same possibilities are offered by digital radio.
As convergence enables incumbent players in the telecommunications broadcasting sectors to expand their roles, it also marks the entry of powerful new players from publishing and IT industries. For information providers, such as publishers, database operators and financial information services, the Internet constitutes a crucial extension of their traditional know-how, and an ideal means of recycling and "repurposing" rich stores of information.
Similarly, IT companies are exercising significant influence on shaping the new
services market in Europe - as they move towards generalised on-line
distribution of software and multimedia content, make substantial investments
into cable and television business, and act as integrators of advanced
television trials in Europe. Underpinned by the exponential growth of
computing power, kept responsive to change by shortened product life-cycles,
used to operating in a fiercely competitive environment, and historically
unhampered by cumbersome regulation, the contribution and potential of the IT
industry to first drive and then benefit from convergence should not be
underestimated.
Fig.4: Locations of the Major Players in the Value Chain and
Relationships between them
(Source: Squires, Sanders Dempsey LLP and Analysys Ltd.)
The significant merger, acquisition and alliance (M&A) activity described in Chapter I are motivated by a range of commercial and strategic factors. The trend towards convergence would be one of these, albeit an important one. Some argue that new market structures reflect a substantial shift in the value chain, with value migrating from simple delivery to the production and packaging of content or the offer of on-line of services and transactions. Liberalisation and competition, coupled with digitisation and significant increases in network capacity of both broadcasting and telecommunications networks, is rendering the transmission and delivery of services a commodity item, converting it into a low-margin high-volume business. Firms currently operating in the lower parts of the value chain are therefore seeking to increase volume on their core activity, through horizontal alliances or organic growth into new geographical markets.
At the same time, they are moving up the value chain to higher margin activities through vertical concentration. Telefónica's purchase of Antena3 TV in Spain, the STET group's creation of Stream in Italy and Microsoft's acquisition of cable television operator Comcast in the USA are all examples of companies moving across sectors as much for strategic as for commercial, profit-motivated reasons. Fig.4 maps out these strategies by type of market player and by element of the value chain brought into play. It also indicates the types of commercial relationship which are emerging between different actors. It should be noted, however, that the representation is schematic and, that neat distinctions between content creation, packaging and service provision are sometimes difficult to establish.
The situation is reinforced by the emergence of new industries filling in the gaps between adjacent sectors; some of the start-up companies pioneering on-line computer networking services a decade ago have grown into multi-billion dollar groups today. CompuServe and American On-line are two cases in point. The recent linking of those two businesses together with Worldcom is a further example of the fluidity of current market structures .
The nature and potential growth of market demand for the new services is the greatest uncertainty facing market players. The signals from the marketplace are conflicting. Supply-side indicators, in terms of M&A activity and investment in new service development, give a positive impression of market potential. On the other hand, although growth rates in Internet services are impressive, only around 8% of European citizens are using the Internet at work, and around 4% at home. This represents a small proportion of the total consumption of audiovisual material, in which TV set penetration exceeds that of the telephone. Moreover, many view the passive consumption of family television viewing to be the mainstay of audiovisual consumption for the foreseeable future.[43]
However, there are some indications of potential change in the patterns of consumption of services and in the home environment. Some of these are taken from market developments in North America, where the use of PCs in homes is currently much greater than in Europe. Parallels drawn from the US market will only be valid therefore to the extent that a similar level of PC use can be achieved in Europe.
Consumers are likely to use new products and services offered through convergence only insofar as those services are useful to them. The take-off of new services cannot therefore be simply supply-driven, but must take account of demand and, in particular the consumer viewpoint. This is reflected in consumption trends which are beginning to show the first signs of a convergence in the home:
In terms of available leisure time and expenditure, the youth segments are already opting for interactivity. Video games alone represent nearly 20% of under sixteen year olds' total media consumption in some markets, according to Arthur Andersen.[44]
A key factor in the take up of new services will be the penetration of PCs in the home, and particularly multimedia and Internet capable PCs. Here whilst PC penetration levels of up to 30% are common in most Member States, penetration of multimedia PCs is considerably lower and Internet usage in the home as mentioned above is growing steadily but from a low base. On the other hand, the current average life of a PC is three years suggesting the current stock of PCs will become multimedia capable fairly quickly, whilst increasing familiarity with these technologies at work and in schools will help to boost home take up further.
One major change in the home has been the transition from collective, family viewing of two or three generalist TV channels to individual family members viewing alone, selecting from the much broader range of channels on offer in today's multi-channel environment. The multi-channel broadcast environment itself competes with packaged media, played on video recorders and video-game consoles. All of this will increasingly compete with the computer, particularly with its use on line.
Aware of the changing patterns of consumption, the television and computing industries are vying for viewers' attention. Broadcasters and TV manufacturers are enhancing the interactive capabilities of their services and equipment. Today's digital television set-top boxes already combine television and telecommunication functionality. TV sets can already double as monitors when connected to low cost Internet appliances. Many in the consumer electronics industry predict that TV sets with built-in PC capability, including Internet access, will become an important feature of the consumer market in the near term.
From the other end of the spectrum, the computer industry is already offering multimedia PCs which allow viewing of television channels. Hybrid WebTV set-top boxes combine Internet and digital TV reception with facilities allowing storage and manipulation of video content, enabling applications as diverse as downloading of films and sending of video-clips as E-mail.
Whether the PC/TV or the TV/PC will win this battle is, at the moment, quite unclear. What is certain however is that the consumer's "home platform" is set for significant evolution over the next few years. Yet at the same time and in parallel, consumer demands and needs for better access to information will also allow for convergence of those telecommunications, media and information technology products and services that cater to public interest domains such as education, health, environment and transport.
This chapter discussed the overall political and economic context for convergence, placing it against 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 from both supply and demand perspectives, punctuating optimistic views on the future realisation of convergence with a realistic view of today's patterns of consumption, and the relative starting points of different platforms such as the Internet and free-to-air broadcasting.
Chapter II highlights the potential for convergence to have a significant impact on society, on employment, growth and competitiveness of businesses in Europe, and on the way we access a range of services, information, entertainment and culture.
(A) Will convergence have a significant impact on job creation, as well as on education and training in the European Union? How is convergence likely to impact the way in which we work? Will its effects be spread evenly throughout the European Community?
(B) What effect are current developments likely to have on telecommunications, media and IT sectors, in terms of the underlying economics of those sectors, the services offered and the likely service providers?
(C) What evidence is there of changes in Europe in the way services, information, entertainment and culture is being accessed in the home and in the office? What are the implications of current levels of PC penetration, Internet use and TV penetration for the take up of new services? What action (if any) is needed to overcome low levels of multimedia computer penetration and Internet use?
(D) In the light of the positions put forward in the Commission Working Paper on the Fifth Framework Programme,[45] what kinds of Community RTD projects should be launched in the context of convergence?