COM(97)623

The Background - Convergence

There is widespread agreement that convergence is occurring at the technological level. That is to say that digital technology now allows both traditional and new communication services - whether voice, data, sound or pictures - to be provided over many different networks.

Current activity in the market suggests that operators from the sectors affected by convergence are acting on the opportunities provided by technological advances to enhance 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 the use of wireless links to homes and businesses to connect them to the fixed telecommunications networks;

Data services over digital broadcasting platforms;

On-line services combined with television via systems such as Web-TV, as well 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 in Europe. They show its potential to touch the lives of every citizen. They also highlight a significant change in the range and diversity of traditional telecommunications and media services.

The Issues - The Stakes for Europe

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

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

The global nature of communications platforms today, in particular, the Internet, are providing a key which will open the door to the further integration of the world economy. This will open opportunities and challenges not only for the European Union, 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 establishing a presence on the World Wide Web, is making it possible both for businesses of all sizes to develop a regional and global reach, and for consumers to benefit from the wider choice of goods and services on offer. Globalisation will therefore be key theme in future developments, as changes in Europe are mirrored by developments all over the World.

If Europe can embrace these changes by creating an environment which supports rather than holds back the process of change we will have created a powerful motor for job creation and growth, increasing consumer choice and promoting cultural diversity. If Europe fails to do so, or fails to do so rapidly enough, there are real risks that our businesses and citizens will be left to travel in the slow lane of an information revolution which is being embraced by businesses, users and by Governments around the World.

Governments and policy makers will have a key role in ensuring that such an environment is in place. However, beyond the regulatory framework which is the central focus of this Green Paper, efforts will continue to be needed, as recognised at the recent Jobs Summit, to equip Europe’s workforce with the skills which the Information Society requires. Continuing support should be given to research and development activities. Governments, regional and local authorities, as well as the European institutions must lead, by example, by fully embracing the technologies and services 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 Union has already developed a comprehensive framework for managing the transition in telecommunications from a monopoly to a fully competitive world from 1 January 1998. We have also put in place a framework supporting an internal market for broadcasting. Getting the right regulatory framework must be firmly placed within these existing achievements. At the same time, this Green Paper represents a milestone in allowing the Community to look beyond the 1998 deadline and to assess the implications for the sectors affected by convergence.

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

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

These matters need to be debated and resolved. Finding solutions will need to take account of the full range of interests in the various sectors affected by convergence. At the same time, the potential for change will be felt in different ways and at different levels (e.g. technology, industry, services and markets). Whilst digitalisation means that convergence is well advanced at the level of technology, this Green Paper does not automatically assume that convergence at one level inevitably leads to the same degree of convergence at other levels. Equally, there is no assumption that convergence in technologies, industries, services and/or markets will necessarily imply 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 consciously interrogative. It analyses issues, it identifies options and it poses questions for public comment. It does not take positions at this stage nor reach conclusions.

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

In Chapter III, actual and potential barriers are identified which may hold back these technological and market developments. Some of these reflect current market or industrial issues of the sectors affected by convergence, whilst others arise from current regulatory approaches. Some of these issues are already being dealt with in Community initiatives, (for example, in areas of intellectual property, media ownership, electronic commerce and digital signatures) and where this is the case those initiatives are identified. In other cases, these barriers serve as a basis for considering the need, if any, to adapt current regulatory frameworks in the light of the convergence phenomenon.

Chapter IV provides a detailed discussion of issues associated with existing and possible future regulatory frameworks or approaches. These issues fall into eight broad areas:

Definitions

Market entry and licensing

Access to networks, to conditional access systems and to content

Access to frequency spectrum

Standards

Pricing

Individual consumer interests.

The chapter concludes with a discussion of public interest objectives, options for possible 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 sectors affected by convergence are set out, and possible options for future regulatory approaches are identified as a basis for discussion.

The Commission believes that the 5 months public consultation period will allow broad participation and debate around issues which are important for citizens, business and for the further development of the Information Society. Comments can be sent in paper or electronic form, and the debate will be assisted by the creation of a specific web-site on which electronic comments can be accessed. There will also be public hearings during the course of the consultation. On the basis of the comments received, the Commission intends to produce a Communication by June 1998.

Conclusions - The Way Forward

This Green Paper represents a step on the way to securing the benefits of convergence for European social and economic development. The June Communication, setting out the results of the public consultation, will allow political positions to be taken by the European Parliament, the Council of Ministers, the Economic and Social Committee and the Committee of the Regions, and for clear objectives for future policy to be established.

This Green Paper initiates a new phase in the European Union’s policy approach to the communications environment. As such it represents a key element of the overall framework put in place to support the development of an Information Society. It builds on the current strengths of the frameworks for telecommunications (launched by the landmark 1987 Green Paper on telecommunication) and for media (established by various Community legislative initiatives). This Green paper builds on these achievements, and offers all interested parties an opportunity to comment on the future shape of regulation, in the post-1998 communications environment, in the sectors affected by convergence.

Introduction iii

I. Convergence - Definitions and Developments 1

Convergence - defining its scope

The enabling role of technology

Current market developments

Summary and questions

II. The impact of convergence on the relevant sectors 8

The social and economic context

Market trends

The consumer perspective

Summary and questions

III. Barriers to Convergence 15

Existing barriers

Potential barriers

Question

IV. Regulatory Implications 18

Challenge to existing regulatory approaches

Tackling the barriers - The regulatory issues

Meeting public interest objectives

Options for a future regulatory model

Issues at an international level

V. Principles and options for the future 33

Principles for future regulatory approaches in the sectors affected by convergence

Options for regulatory development

Timetable for future action

Conclusions

Annex: Existing regulation 37

The Information Society is becoming a reality. Its development is fuelled by the rapid technological change which is transforming the information industries. The nature and speed of this transformation may pose new challenges to policy-makers.

One of the most significant factors is the increasing use by different sectors, notably the telecommunications, media and information technology (IT) sectors, of the same technologies. Evidence of such convergence has been mounting in recent years with the emergence of the Internet and with the increasing capability of existing networks to carry both telecommunications and broadcasting services.

The phenomenon of convergence is relatively new and a range of different views exist on what its implications are for society and for economic activity. There is broad agreement that developments in digital electronics and software are creating the technological potential for a new approach to the delivery and consumption of information services. There is less agreement on how much these developments will change existing practices and over what time-scales. Some consider that convergence will lead to the complete and rapid transformation of existing telecommunications, media and information technology services in such a way that these currently separate groups of services will merge into one another, substantially blurring the previously clear distinctions between them.

Others feel that the specificity of the existing separate sectors will limit the scope for service convergence, and that the media industry has a role as the bearer of social, cultural and ethical values within our society, independent of the technology relied upon to reach the consumer. This would mean that regulation of economic conditions and that of the content of information services should be separated to ensure efficiency and quality. Others believe that, if it does occur, it will evolve over an extended time-scale.

It is nevertheless clear that the implications of these developments are potentially far reaching. The emergence of new services and the developments of existing services is expected to expand the overall information market. This will provide new opportunities for economic growth and employment. At the same time the new communication services environment will also provide opportunities to enhance the quality of European citizen’s lives, by increasing consumer choice, facilitating access to the benefits of the Information Society and promoting cultural diversity.

These developments are therefore positive for European economic and social development and should be encouraged. Public policy will need to provide a supportive environment for convergence in order to ensure that the potential opportunities are grasped in a timely fashion.

What is needed now is wide ranging and deep debate on the convergence phenomenon and its implications as an input to such policy formulation. The objective of this Green Paper is to start such a debate.

This debate needs to be set into context in respect of other important Commission actions in the telecommunications, media and information technology sectors. In particular, this debate is central to the future communications landscape following the full liberalisation of telecommunications services and infrastructure by 1 January 1998. The process started by the Green Paper should ensure that during the overall review of the effectiveness of the 1998 regulatory package for telecommunications (to take place at the end of 1999), full account can be taken of the impact of convergence on that sector. Furthermore, the Cable Review, carried out in the light of liberalisation and more specifically as a result of the commitment contained within the Cable Directive and the (telecommunications) Full Competition Directive is the subject of a separate Commission communication. The review aims to create an open and pro-competitive market structure in the provision of telecommunications and cable TV networks which may have a significant impact on the markets affected by convergence. In particular, it will encourage competition and prevent the emergence of new anti-competitive gatekeeper positions or bottlenecks. Vigorous competition in these areas will encourage the development of innovative new services which will benefit consumers in the European Community, and will provide European industry and service providers with the expertise to compete on global markets.

Against the background of ensuring a competitive basic market structure, the timeliness of this Green Paper stems from the fact that new markets may develop rapidly, and that they will be essentially global in nature. If the applicable regulatory frameworks in individual Member States or, indeed, in Europe are not appropriate to the development of these new markets and even hinder their development, then Europe may find itself at a competitive disadvantage vis-à-vis its more flexible global competitors. This could restrict consumer participation by limiting choice and weakening consumer confidence in the new services, and have negative consequences for economic growth and employment creation in Europe.

The Green Paper addresses the nature of the convergence phenomenon, and focuses on the provision of services and the underlying networks over which they are carried. It further deals with the implications for both the shape and substance of regulation which may arise from convergence. Although the Green Paper deals with certain aspects of the regulatory framework for service provision, any future initiatives in this field would be without prejudice to existing on-going work within the Commission or the implementation of existing Community legislation.

The Green Paper does not take definitive positions with respect to new regulatory structures. Indeed, it recognises that convergence may lead to less regulation in telecommunications and media sectors, and should not lead to more regulation in areas such as IT. Rather it analyses the convergence phenomenon as evident in the market; it identifies issues relating to regulation arising from these developments, and it poses questions in relation to these issues.

All interested parties are invited to contribute to the debate by responding to these questions and by making any submission they wish on the subject. The period of such consultation is set for five months from the date of publication of this Green Paper. It is intended to produce a report on 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 A4
Attn. Mr. E. Lalor
200 rue de la Loi, BU31 0/62
B-1049 BRUSSELS
Belgium

Fax (+32 2) 296 9009

and/or

European Commission, DG X C1
Attn. Mr. G. Paulger
200 rue de la Loi, L-102 5/25
B-1049 BRUSSELS
Belgium

Fax: (+32.2) 299 9201

and/or

E-mail: convergencegp@cec.be

Hard copies of all submissions will be made available at the conclusion of the consultation, unless a request for confidentiality is received. A Web site has been opened for the posting of both the Green Paper and submissions received. The web address is:
http://www.ispo.cec.be/convergencegp

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.

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.

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.

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 thit 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.

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.

Digital technologies underpin convergence

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. 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.

Network technologies for convergence.

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. 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, xDSL and ATM 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.

Internet technology is leading to platform independence

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.

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.

Digital television and digital audio broadcasting services are changing today’s audiovisual landscape

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, and against the background of a regulatory framework provided by the Television without Frontiers Directive, the Television Standards Directive and other measures, 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:

Other innovations in the broadcasting field include Widescreen TV using 16:9 format, the technical possibility of higher definition pictures.

Telecommunications liberalisation is widening choice and lowering prices

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 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 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.

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 and has most recently been returned to in the Commission’s two Communications on Universal Mobile Communications.

The Internet is bringing new services to business and the public at large

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.

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.

Mergers and Alliances are reshaping existing industries

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.

Competition policy: the need to keep markets competitive

In the past, the Commission has applied the Community competition rules to convergence cases, 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.

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.

Question 1: The nature and impact of convergence today

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?

Social aspects

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, and the Bangemann Report published the following year. 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.

Community initiatives for
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, the High-Level Group of Experts on the social aspects of the Information Society, the Commission White Paper on Teaching and Learning, the Green Paper on Living and Working in the Information Society, 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. 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. The European Parliament and the Council have been active in this area, and a recently-adopted Communication describes how the Information Society must transcend a wide range of EU policies.

The many initiatives now under way in furtherance of the Information Society are being pulled together in a Rolling Action Plan 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. The second phase, an outcome of the Corfu summit,^, is based on a updated set of priorities: the business environment, education and training, protection of the public interest, and the international dimension.

Impact on economic and industrial competitiveness

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. 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. 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. 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.

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, 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. 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.

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.

New services

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.

New players

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.

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

New market structures

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 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.

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.

The changing patterns of consumption

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 1998, for the first time more personal computers will be sold in the world than television sets; this must of course be set against the very high penetration of TVs in the home, and the fact that PCs are sold to both businesses and homes;

in 1995, Americans spent less than half of all screen-viewing time in front of computers; recent US audience measurements indicate that Web users already consume 59% less television than average viewers and it is estimated that the TV set’s share of screen time will be half that of the personal computer in 2005; on the other hand, audience figures for 1995/96 show that the average daily viewing time in Europe increased by 4 minutes, compared to a decrease of 2 minutes in the US;

research into activities displaced by increased personal computer usage shows that watching television loses out rather than reading books and magazines, or playing console video games. According to Price Waterhouse, young adults in the US between 18 and 35 who used to spend 4 hours a day watching TV now spend one of those hours ‘surfing the net’.

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.

Changing home environment for consumption

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.

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.

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

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, what kinds of Community RTD projects should be launched in the context of convergence?

Convergence is already showing signs of being a key driver of current developments in telecommunications, media and information technology industries. The range of developments and trends for comment identified in Chapters I and II above have the potential to impact substantially on the take off of the information society in Europe.

In order to formulate an appropriate response to current developments, it is important to launch a broad debate on what, if any, barriers exist - actual or potential - which may hold back the trend towards convergence.

Chapter III attempts to identify such barriers and invites comments on their impact. Not all the barriers identified are regulatory in nature, nor is a regulatory solution the only means of resolving potential problems. Nevertheless, it seems sensible in the overall context of this Paper to invite reflections on a wide range of factors which might impact upon the process of convergence.

Where regulatory barriers are identified therefore, there should not be an automatic assumption that a regulatory response is required. As stated earlier, the application of competition rules to this sector is important, and market solutions which remove barriers to convergence within the context of those solutions will often be more appropriate.

At a Community level, actual or potential barriers must be assessed against the basic objectives of the Treaty, such as the establishment and functioning of an Internal Market; the promotion of a system of undistorted competition; the realisation of trans-European networks, or the maintenance of a high standard of consumer protection. They must also be examined as well as against the specific freedoms envisaged in the Treaty, such as the rules relating to the freedom to provide services or the right of establishment.

In the following sections, we attempt to identify key actual and potential barriers to the development of the convergence phenomenon and ultimately to the realisation of the Information Society in Europe.

Access to users. Approaches differ between sectors with regard to the ownership and operation of networks. This means that many services will have a limited choice of routes to the customer. Even where legal monopolies have been abolished, the economics of the local loop may leave current telecommunications and cable TV network owners with a predominant role in connecting customers in many markets. Where bottleneck facilities are controlled by vertically-integrated players, there is the potential to limit competition at the service level.

Regulatory restrictions on use of infrastructure. Current restrictions in some Member States (and not others) regarding what types of services can be carried on different infrastructures could make it difficult for operators to formulate unified strategies addressing pan-European markets. It may also prevent economies of scale being realised. The resulting higher unit costs, and hence tariffs, could hold back the delivery of innovative services.

Prices for telecommunications services. High prices for telecommunication services and for the underlying network infrastructure used to deliver services may impact significantly on the demand for services. Among the reported reasons for Internet’s success in North America is the widespread application of a flat-rate tariff structure offering ‘free’ local telephone calls, and the fact that competition has led to lower charges for leased network capacity. This results in significantly lower costs for access providers.

Availability of content. As mooted in Section II.1, expansion in the means of delivery brought on by improvements in technology and by convergence may shift the bottleneck from delivery to content, and may lead to a shortage of adequate content in the medium term. Premium content is already a key factor for success in both digital and analogue television markets, Continued shortages could inhibit new market entry, and with it competition and innovation.

Fragmentation of EU market. Expansion in the number of broadcast television channels will be likely to be at the expense of the market shares of existing broadcasters. Shrinking market shares could be offset by widening the target audience beyond national frontiers. Similarly, as new services develop, much innovation will come from small players exploiting niche markets, or from large players funding large R&D budgets. Either way, they will both need larger volumes than can be provided by national markets in order to defray their costs. Whilst TV channels are free to seek larger audiences as a consequence of the Television without Frontiers Directive, the principle challenge for them may be one of multilingual, multi-cultural audiences, rather than potential barriers to establishment in countries in which they wish to establish a commercial presence.

Insufficient IPR protection. Content providers will only be willing to make content available if their intellectual property rights are sufficiently protected. Similarly, publishers and operators will only invest in innovative services if they are confident that new means of delivering information and/or services provides an adequate degree of protection for the intellectual and industrial effort of their organisations and those of content providers. Insufficient protection is already a barrier for off-line electronic content, and this could project into the on-line world. Recent WIPO agreements referred to later in the Paper are helping to clarify the current situation.

Regulatory uncertainty Regulatory uncertainty resulting from the scope of current definitions; the way they are applied or whether they fit changing market structures or service characteristics could constitute an important barrier to investment by market players. Whilst many definitions today (at both a national and Community level), such as those of telecommunications, voice telephony, television broadcasting or information society services will continue to remain valid for many activities, the provision of services may be nevertheless be held back where those definitions leave businesses uncertain as to the regulatory treatment which their services will receive.

In some cases, this may simply be a risk that, notwithstanding current definitions at a Community level for both broadcasting and telecommunications activities, regulators in some Member States may place a particular novel service under one regulatory regime, whilst it is considered to fall under another regime in other Member States.

Furthermore, within Member States barriers could result if similar services were regulated differently, for example on the basis of the platform over which they are delivered.

In other cases, the characteristics of services in the future may mean that they straddle more than one regulatory area on the basis of current definitions. This may result in a disproportionate regulatory burden on certain services.

Finally, the technological and market trends identified in Chapters I and II may also challenge the basis on which definitions are currently drawn up.

One example of regulatory uncertainty arose during the recent French election campaign, where rules prohibiting the publication of opinion polls in the week prior to the election applied to off-line media, but not to polls published on the Internet. A number of editors in these circumstances ignored the ban which placed traditional media at a disadvantage.

Multiple regulatory bodies. The process of obtaining regulatory clearance in all Member States and potentially from different regulatory bodies for a particular package of services may create substantial overheads for those wanting to operate on a pan-European basis. The provision of services may be held back where market players are subject to a number of regulatory regimes or must deal with multiple regulatory bodies, for example, where a network is required to be licensed both as telecommunications infrastructure and as a broadcasting network (because it is used to offer both services).

Market entry and licensing. There are differences within the telecommunications, media and IT sectors with regard to whether or not market entry is unrestricted, limited or subject to monopoly or special rights. The IT sector is generally free of licensing procedures.

Any use of licensing or any regulatory limitation on market entry represents a potential barrier to the provision of services, to investment and to fair competition and should therefore be limited to justified cases. In particular, the trend should be towards limiting regulation where potential barriers exist, rather than extending heavier regulation to more lightly regulated sectors in order to equalise market conditions.

Where licensing continues to be important, there is considerable variation between sectors and between Member States in the length of time it takes to obtain licences; the transparency of procedures; the duration of licences and the fees paid. Many telecommunications and broadcast network licences are national in scope, but others - particularly for cable TV delivery are regional or local in scope. All of these factors, whilst acceptable in the context of the specific sectors, may make it harder or more expensive for organisations to offer an integrated package of services, particularly across borders. This may represent a disproportionate burden given that the technology promotes such integration and there is likely to be increasing demand from both business users and consumers for such integration.

Access to networks, conditional access systems and content. The issue of access is principally a matter for commercial negotiation, subject to the overall safeguards provided by competition rules. Nevertheless, there is currently an asymmetry in that access rules are in place only for certain networks (for example, the interconnection and open network rules which apply to telecommunications networks, but not to infrastructure used for broadcasting activities. Similarly, a framework exists for conditional access systems for digital television, but not for all types of digital services. (Note that in the latter case, the UK is currently consulting on the development of common framework for conditional access systems for all digital services).

Where market players control the access to the customers, for example, through ownership of the local loop, or through control of conditional access technologies, the company concerned may be able to discriminate in favour of its own services.

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 as national sporting events where the revision to the Television without Frontiers Directive has provided for the mutual recognition across the Community of events reserved by Member States for free-to-air television broadcasting.

Allocation of radio frequency and other resources. The provision of services (and the development of effective competition) will depend on the availability of sufficient network capacity, which for many services means access to radio spectrum. The parallel expansion of television broadcasting, mobile multimedia and voice applications, and the use of wireless technologies within fixed networks will lead to a significant growth in demand. Where there are marked differences in the amount of spectrum available or the way in which it is allocated, potential barriers are likely to arise, impacting the underlying cost-bases of network operation in the different sectors, potentially encouraging competitive entry into one sector rather than another.

Varying approaches to the achievement of public interest objectives. The regulatory frameworks for each of the sectors affected by convergence contain a variety of measures seeking to ensure particular public interest objectives which are specific to those sectors and which are consistent with Community objectives. Indeed the Commission attaches great importance to the delivery of general interest services in particular, in ensuring social and regional cohesion in the Community, whilst in the telecommunications area, the steps taken to ensure universal service at a national level now flow from a framework established at a Community level. Nevertheless, the manner in which such objectives are pursued (rather than the objectives themselves) may represent a potential burden to the organisations subject to obligations in respect of their implementation.. In the context of the cross-border provision of services, tensions between differing approaches between sectors and between Member States, could deter such service provision or investment in innovative services or networks.

Public confidence in new environment. Where the level of protection relating to consumer protection, the legal treatment of electronic transactions, or data protection and privacy vary across sectors, users and consumers may lack confidence in the services and systems made available, holding back the development of converged services.

Question 3: Barriers to convergence

Chapter III highlights both actual and potential barriers to convergence.

What is the likely impact of the barriers identified and are there other barriers or factors which may have a significant impact on the convergence process in Europe?

In examining the impact of barriers identified above, Chapter IV considers first whether certain features of the convergence phenomenon create new and specific challenges for regulation.

Areas where the convergence phenomenon could raise difficulties for existing regulatory approaches are identified below. These challenges apply both to the substance of regulation and to its practical implementation. Possible solutions to these issues are discussed in Sections IV.3 to IV.5.

The role of regulation

Regulation is not an end in itself. Instead, it is simply a tool, alongside the use of market forces, for achieving wider social, economic and general policy objectives, such as those highlighted in Chapter II. This has already been recognised in the Commission’s Communication on electronic commerce, which proposed the principle of "no regulation for regulation’s sake". This principle applies equally to all areas of convergence. The fundamental objectives underpinning regulation in the Member States are not undermined by convergence. These objectives are varied and tailored to the specific needs of different sectors, but include national goals such as promoting efficiency, economic welfare, and the public and consumer interest. At a Community level, similar aims are reflected in the provisions and objectives of the EC Treaty.

Nevertheless, the nature and characteristics of convergence which are examined below, as well as the perceived need of industry actors for regulatory intervention to be limited and closely targeted, should lead public authorities at both a national and a European level to re-examine the role and weight of regulation in a converging marketplace. Three key issues can be highlighted:

The role of market forces. Some commentators place particular stress on the need to place greater reliance on the ability of market forces to ensure regulatory objectives. They would argue that this philosophy is reflected in the evolving approach in most Member States to universal service in telecommunications, or in the IT and broadcasting worlds by the industry-led development of interoperable standards and software. Others are doubtful about the ability of market forces to provide adequate ex ante guarantees for consumers, and recognise an important role for regulation in safeguarding public interest objectives.

The balance between sector-specific regulation and competition rules. A further key issue is the balance between competition rules and sector-specific regulation, with many arguing for a preference to be given to the application of competition rules to individual cases within a converged environment, rather than the further development of extensive regulation.

Finding workable solutions. Where regulation is in place it must apply in a workable and timely manner. The global nature of the Internet or the regional nature of satellite-delivered services point to the potential difficulties of enforcing the rules of one Member State in other countries; whilst the rapid pace of change in terms of services and products, measured in months and weeks, presents a real challenge for anyone seeking a legislative solution to any particular problem. Such solutions at a Community level tend to be measured in months and years.

The challenge to the consistency of regulation

A key feature of a converged environment is the possibility that any network can be used to deliver a much wider range of services than is currently the case. It does not automatically follow that the delivery of different services over a single network or via a single service platform makes those services the same, nor that the public interest objectives underpinning regulation automatically transpose from one service to another.

For example, whilst a film, a song, a railway timetable and a phone conversation may all be carried in a digital form, this does not result in the user treating these different services/ activities as interchangeable. In the same way, regulatory approaches to each of these services, whilst potentially based on similar general principles, are likely to continue to be tailored to the specific characteristics of these different services.

Nevertheless, as stated in chapter III, regulating essentially similar services differently, particularly, on the basis of the technology used to deliver the service, could represent discriminatory treatment which might hold back competition, investment and the provision of services. One example of the treatment of opinion polls under French election law was already cited. Another example could be the limited scope of the current Interconnection regime in telecommunications which would offer interconnection rights to an organisation operating a public telecommunications network, but not to someone operating a broadcasting network. Interconnection between the two may be of particular importance in the context of services which use broadcast media to download information and services, but rely on the telecoms network to provide a return channel.

In assessing such differences in regulatory treatment both across sectors and between Member States, any analysis at a Community level would need to consider whether continuing differences were consistent with public interest objectives identified in the Treaty and by the Court of Justice and whether the rules in place were proportionate to the objective sought. Where the answer to either question is no, the rules in question could be attacked before the Court of Justice.

Where the barriers resulted from measures which are fully consistent with the Treaty and where principles of mutual recognition could not be applied, Community measures (such as harmonising legislation) might be then justified.

The challenge of globalisation

The globalisation of services is a feature of the new landscape. While satellite television broadcasting represents one example, it is the Internet which constitutes the quintessential global network. The Internet’s structure and ubiquity potentially allow it to defy attempts to apply existing regulatory objectives at national level.

In the new global environment, the way in which networks and services are regulated in different regions has the potential to impact substantially on investment in those regions. Excessive or inadequate regulation in one region could result in a migration of economic activity elsewhere, with adverse consequences on the development of the Information Society in the former region.

The challenge of abundance to regulation based on scarcity

Convergence may challenge current regulatory approaches, particularly, with regard to the licensing of networks and allocation of resources, where such approaches reflect a perceived scarcity of both radio-frequency and of content.

Current market technological trends, such as substantial increases in network capacity; the possibility of content and services to be delivered over a number of platforms; the increase in competing routes to customers and improvements in digital compression suggest that in a fully digital environment, scarcity may over time become a less significant issue, calling for current regulatory approaches to be reassessed.

Nevertheless, the removal of scarcity in the transmission network will not necessarily be accompanied by a corresponding increase in content or services (in particular, "premium" content or services needed to fill those channels.) In any event, pending the complete migration of the broadcasting sector from analogue to digital services, capacity bottlenecks are likely to continue for the foreseeable future.

The challenge to distinctions between public and private activities

Convergence will not prevent the implementation of regulation based on distinctions between what is private or public, but it may shift the boundaries of where lines between the two can be drawn. This could have consequences for the level of regulation applied to a particular service. To the extent that rules have been formulated on the basis that particular networks, services or activities are public rather than private, a reassessment may be required to determine whether current boundaries between what is public and what is private remain valid in the light of technological developments. For example, new means of delivering services, interactivity, and the possibility of per-transaction payments may make it harder to draw those lines in the future.

Another practical example, is reflected in the two recent WIPO treaties which relate, inter alia, to copyright. These have clarified that a "public communication" for the purposes of copyright law includes the situation where a work is made available to the public (for example, via a web site) in an interactive way.

The challenge to regulatory structures

The fragmentation, complexity and diversity of regulatory structures involved in the converging sectors was one of the issues highlighted in Section III.2 above. To the extent that a risk of overlapping regulation exists or the need to deal with multiple regulators within or between Member States, market players may call for a rationalisation of current structures in order to avoid unnecessary administration creating barriers. For example, where services can be offered over a single network, organisations may benefit from dealing with a single regulatory authority in a Member State on questions linked to that network, irrespective of the services offered over the network.

Question 4: The impact of convergence on current regulation

Chapter IV.1 examines the challenges which current developments pose to the balance between regulation, competition rules and reliance on market forces. It also considers how the convergence process may impact on the principles underpinning current regulation in the telecommunications, media and IT sectors.

(A) Do current developments require more or less regulation in the sectors affected by convergence, more or less reliance on competition rules, and more or less reliance on market forces to achieve the objectives identified in earlier Chapters?

(B) Whether and if so, to what extent convergence challenges the principles underpinning existing regulatory approaches in the telecommunications, media and IT sectors?

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

Definitions

Market entry and Licensing

Access to networks, to conditional access systems and to content

Access to frequency spectrum

Standards

Pricing

Individual consumer interests

The section does not address a number of issues which are currently the object of separate initiatives within the Commission. These include areas such as media ownership, digital signatures, and encryption, and as mentioned above, intellectual property rights, copyright and related rights.

IV.2.1 A need for new definitions?

Current definitions delimit the boundaries between different sectoral regulation and different regulators. Regulation is linked to the definitions of activities. Although regulation can be "technology neutral", as in the broadcasting sector (and increasingly in the telecoms sector) it may be linked to the technology used to offer services, as well as between areas which are regulated and those which are largely free from detailed rules.

The convergence process will not remove the need for definitions, but uncertainty about the regulations applicable to activities or different definitions at national level could create barriers to investment or to the provision of services. At the same time, it should be noted that the fact that different services can be delivered over the same network does not in itself alter the character of the services so that they become one and the same service.

In the light of the potential barriers identified above, current approaches to regulatory definitions (and the way in which those definitions are applied by regulatory authorities) should be examined to consider whether they:

are sustainable in the light of technological developments;

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

lead to discrimination by allowing similar networks or services to be regulated differently.

A number of Member States have provided definitions for certain new activities. In Germany, new concepts of "teleservices" and "media services" have been created, focused on the nature of the activity rather than the underlying technology. Audiovisual law in France has also focused on the nature of the service rather than its underlying platform.

Possible options

One option would be to continue to work with existing definitions, recognising that these remain valid for the majority of services offered and to extend, where appropriate, the principles underpinning current regulation, whilst adapting the way in which it is applied to take account of the specific characteristics of the "new" services.

A second option might be the creation of a separate category of "new" services to co-exist with existing definitions.

A third option would be the adaptation of current definitions used in telecommunications, and/or broadcasting to reflect current trends and developments.

IV.2.2 Market entry and Licensing

Among the potential barriers identified in Chapter III were a number resulting from the impact of the differing market entry, licensing and operating conditions in the sectors affected by convergence. This raises a number of issues which are considered below:

Market Entry

The grant of special and exclusive rights by Member States is not incompatible with the Treaty rules, where such rights are justified for the fulfilment of a task of general economic interest assigned to the undertaking concerned and proportionate to the achievement of the objective in question, even if those rights result in a restriction of competition or a barrier to the free movement of services.

In this context, some would advocate that where any network can potentially carry any service, public authorities should ensure that regulation does not stop this happening. They would argue that to allow artificial restrictions on the use of networks, or to maintain monopolies where other parts of the converged environment are fully open to competition, may deny users access to innovative services, and create unjustified discrimination. Such an approach would be seen by them as running counter to the technological and market trends identified earlier in this Paper.

Barriers could occur in a number of ways:

the grant of monopoly or special rights over networks or services to one or a small number of companies, may prevent others from providing the same service;

limiting the services that can be offered over a given network (for example, preventing a telecoms operator from using its network to offer entertainment services)

requiring certain services (such as free-to-air broadcast channels) to be carried, which reduces the scope for other services to be provided,

Others would argue that the grant of limited rights or limiting the use of networks to particular purposes are important ways of encouraging investment.

Some also argue that these types of restrictions are particularly important where competition is at an early stage or where a particular player enjoys a very strong position (for example, over a competing network or over "premium" content). In such cases, specific safeguards can ensure that potential competitors are not discriminated against or that there are adequate incentives for them to enter the market. According to this argument, appropriate safeguards might take the form of accounting separation or transparency requirements, structural separation or even full line-of-business restrictions.

Licensing

Many activities and areas in the computing, and IT areas are not subject to licensing requirements. That is likely to continue to be the case in the future and the Commission sees no reason why there should be any change in this practice, providing IPR issues are effectively addressed.

At the same time, licensing is likely to remain a key regulatory tool through which public authorities can exercise control over their national markets, particularly in relation to the provision of telecommunications and broadcasting networks and services.

Any assessment of the justification for, and effectiveness of, licensing procedures must in the first instance be made in the context of the specific sector to which these rules are applied. Nevertheless, the range of potential barriers identified in Chapter III linked to licensing suggests that this issue could need to be examined more closely in the light of technology and market trends.

Some commentators argue that a key aim must be to make it easier to get into the market and to move towards lighter obligations applied in a consistent manner across the converged environment. They are therefore encouraged by examples in the computing, Internet and on-line publishing industries, where a degree of self-regulation, for example, in relation to harmful or illegal content on the Internet, has supplemented the application of general laws, such as competition or consumer protection rules applying across whole range of economic activity. Even so, self-regulation is not without risks for the Internal Market given the greater possibility for divergent approaches in developing self-regulation, unless co-ordinated to some degree at a Community level.

At the same time, even where licensing systems are not needed and self-regulatory solutions are proposed, consumers may still require guarantees that their interests are adequately protected and that the respective responsibilities of service providers and operators are identified with regard to the consumer. Consumers should be fully involved with the development and operation of any self-regulatory approaches.

The global dimension of the Internet and other communications and broadcast services will also impact on approaches to the enforcement of licensing, and call into question the relevance of national licensing of activities carried out either within a Member State or delivered by regional platforms, for example, by satellite.

Encouraging innovation and efficient operation through licensing. Awarding authorities could consider moving away from licensing approaches which prevent innovation or limit efficient operation. One example, in the telecommunications area, would be tying the delivery of services to a particular technological platform - for instance, by requiring separate licensing (beyond frequency assignment procedures) for a fixed network ope