Strategic Review of Digital Communications Discussion Document
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Strategic Review of Digital Communications Discussion document Consultation Publication date: 16 July 2015 Closing Date for Responses: 8 October 2015 Strategic Review of Digital Communications About this document This document summarises the main elements of the review that Ofcom is conducting into the UK’s digital communications markets. This is our first strategic assessment of the telecommunications sector in ten years and only the second since Ofcom was established. The aim of the review is to make sure digital communications markets continue to work for consumers, citizens and businesses. It considers future policy challenges across fixed, mobile and content sectors, including: • investment and innovation, delivering widespread availability of services; • sustainable competition, delivering choice, quality and affordable prices; • empowered consumers, able to take advantage of competitive markets; and • targeted regulation where necessary, deregulation elsewhere. Since announcing the review in March 2015 we have met with a variety of stakeholders including companies we regulate, consumer groups, industry observers, academic experts and public bodies. We also held a stakeholder forum in May and a series of workshops. This document is consulting stakeholders more formally. We hope to hear from everyone involved in digital communications services, including consumers, businesses, communications providers and public bodies, from across the UK’s nations and regions. We are also interested in the views of policy makers and legislators who set the statutory framework that we operate in. Our aim in publishing this document is to ensure that any conclusions we reach are based on an accurate assessment of all available evidence. We are keen to hear from those with alternative views on our analysis, or wish to offer their own. We have not at this stage made any proposals for changes to our regulatory strategy and approaches. We will consider all consultation responses and evidence within our emerging views document due for publication at the end of the year. Our emerging views document will include any proposals to change our regulatory strategy. Any changes may be implemented through the current legislative framework. Alternatively, it is possible we might recommend legislative change either to the European Framework or domestic legislation. This consultation will close on 8 October 2015. Please send your responses via our web- form (http://stakeholders.ofcom.org.uk/consultations/dcr-discussion/howtorespond/form) or email them to [email protected]. Strategic Review of Digital Communications Contents Section Page 1 Executive Summary 1 2 Introduction 19 3 Ofcom’s current strategy 20 4 Market context 24 5 Strategic policy challenges in overview 44 6 Widespread availability of services 46 7 Extending availability through targeted public policy 61 8 Convergence and changing market structures 72 9 Strategies for sustainable competition 83 10 Promoting efficient investment through regulation 108 11 Regulating vertically integrated firms 116 12 Empowered consumers 132 13 Delivering quality of service 145 14 Targeted regulation and opportunities for deregulation 158 Annex Page 1 Questions for discussion 169 2 Responding to this document 172 3 Ofcom’s consultation principles 174 4 Consultation response cover sheet 175 5 Glossary 177 Strategic Review of Digital Communications Section 1 1 Executive Summary Reviewing a very different landscape from that of 2005 1.1 The telecommunications sector today bears little resemblance to the one Ofcom last reviewed. Our strategic assessment concluded in 2005, at a time when: • Fixed broadband services were widely available, but only had to deliver a speed of 128kbit/s to qualify as ‘broadband’. Today, superfast broadband can deliver speeds of at least 30Mbit/s to 83% of UK premises1. Availability is expected to increase to 95% of households and 82% of small and medium businesses by 2017. • Fixed broadband take-up stood at 31%, compared to 78% now, and nearly one in three connections is now superfast2. • Mobile broadband was in its infancy. The new mobile data networks were based on 3G technology. The catalyst for so much innovation, Apple’s iPhone, was still two years away. Now, two thirds of UK adults own a smartphone, and over half of UK households have a tablet3. • The first tentative TV services over broadband were appearing, but consumer take-up was low. It would take the launch of BBC iPlayer in 2007 and Netflix in 2012 to show the potential of streaming video services, delivered over broadband internet. Now, 48% of data carried over the UK’s fixed broadband networks is streaming video4. 1.2 Although this explosion in new services has been largely driven by the commercial sector, competition policy has also played an important role. 1.3 In fixed telecoms, Ofcom’s first strategic review resulted in the creation of Openreach as a functionally separate entity from the rest of BT. Openreach is responsible for operating the ‘last mile’ of BT’s access network on behalf of all communications providers. Competing providers could now access BT’s network on equal terms, and this contributed to one of the most competitive broadband markets among major European economies. The average price of a residential fixed broadband package has fallen by 40% in real terms between 2004 and 20145, and take-up of superfast 1 Ofcom analysis of operator data, May 2015. This data has been collected from operators for our forthcoming Infrastructure Report Update, due to be published later this year. 2 Ofcom / operators 3 Ofcom Technology Tracker, Wave 1, 2015, Table 32/54/66: http://stakeholders.ofcom.org.uk/binaries/research/statistics/2015April/Ofcom_Technology_Tracker_ Wave_1_2015_Data_Tables1.pdf 4 Infrastructure Report, November 2014, p.164: http://stakeholders.ofcom.org.uk/binaries/research/infrastructure/2014/infrastructure-14.pdf 5 Ofcom / operators. Note: Includes VAT. Figures expressed in 2014 prices. 1 Strategic Review of Digital Communications broadband in 2013 was double the average6 of the other four major European economies7. 1.4 In mobile, competition has cut the price of a typical bundle of mobile services by two- thirds in real terms, from around £40 in 2003 to £13 in 20128. Access to spectrum has kindled this competition, with the 3G spectrum auction designed to encourage a new network operator into the market, and the 4G auction to maintain four national wholesalers. Lower prices have been accompanied by innovation: for example, Three, as a challenger brand, introduced ‘all you can eat’ data tariffs and use of Skype voice over IP (VoIP) services, and scrapped roaming charges from a number of countries. 1.5 In TV, paying for services has gained momentum, increasing from 44% of households ten years ago to 59% today9. TV is also delivered over broadband, and is increasingly part of retail bundles with broadband and telephony. Connected TV customers are increasing: more than 50% of UK TV homes are estimated to have a connected TV device10. Online TV services have also seen significant growth: Netflix now has 4m UK customers and Amazon Prime has 1.2m customers11. 1.6 In 2010, following a review of pay TV, Ofcom concluded that Sky should be required to offer Sky Sports 1 and 2 to competing retailers. While this decision has been subject to legal appeal, interim arrangements remain in place that maintain the regulation’s effects for a number of providers. Consumers are now able to purchase retail bundles that include these channels not only from Sky and Virgin Media, but also from TalkTalk and BT. New challenges may be emerging 1.7 Serving the interests of consumers and citizens – whether private individuals or businesses - sits at the heart of Ofcom’s work. It is our job to make sure that markets work for them by encouraging competition where appropriate. Changing demands from consumers and businesses 1.8 Although the UK’s telecoms users have enjoyed largely positive outcomes in the last decade, some concerns remain. As we all become increasingly dependent on communications, more needs to be done to make sure there is widespread availability of both superfast fixed broadband and better mobile coverage. This is particularly pressing for people in less densely populated areas, for vulnerable consumers, and for small businesses. More generally, there are also continuing concerns about the quality of service delivered by some providers. 1.9 There are also fresh challenges to meet. Although estimates vary, all agree that future demand for data will grow substantially. In fixed telecoms, this is likely to need 6 International Communications Market Report, December 2014, p.25: http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr14/icmr/ICMR_2014.pdf. 7 France, Germany, Spain and Italy 8 Citizens and communications services, January 2015, p.33: http://stakeholders.ofcom.org.uk/binaries/research/cross-media/Citizens_Report.pdf 9 Ofcom Technology Tracker, Q1 2005-2015 10 Research from media consultancy 3 Reasons. Connected TVs refers to TVs connected to the internet, either via a set top box or a smart TV at the end of 2014 11 BARB Establishment Survey, Q1 2015 2 Strategic Review of Digital Communications a new wave of investment in ‘ultrafast’ broadband services. In mobile, more investment will probably be needed in 4G and, ultimately, a transition to 5G. The structure of communications markets and services 1.10 How services are delivered to consumers and businesses continues to change. Consumers can buy services and connectivity from vertically integrated providers in “managed” bundles together with their broadband connection, or they can separately purchase services ‘over-the-top’ (‘OTT’) via the internet. The relative value attributed by consumers to their broadband connection on the one hand, and the content and services delivered over it on the other, are also subject to continuous change. 1.11 At the same time, there has been a spate of mergers and acquisitions across Europe, and indeed globally, with a stated aim of addressing the increasing convergence of services and the growing importance of scale.