No. 289 (January 2002)
Vertical or Horizontal markets?
In much of Europe, pay-TV operators have pioneered digital TV. As the transmission costs for digital TV are significantly less per programme service than for analogue TV, pay-TV operators were keen to exploit the opportunities offered by digital TV and to achieve a rapid migration from analogue to digital.
However, most of the pay-TV operators have adopted proprietary standards for certain elements of their systems, such as Conditional Access. Such decisions have created vertical markets in which digital TV receivers are "service specific" in that they are unable to receive services offered by other pay-TV broadcasters.
From the perspective of pay-TV operators, this lack of interoperability could be considered to be beneficial because it has the side effect of making it more difficult for their subscribers to change to competing pay-TV services. In some circumstances, such behaviour might be considered anti-competitive, but we also need to recognize that most pay-TV operators have taken substantial risks in launching digital TV – and that many have heavily subsidised the costs of digital TV receiving equipment for their subscribers so as to encourage rapid adoption.
Today, there are about 1500 direct-to-home digital TV services being broadcast by satellite across most of Europe. Some free-to-air broadcasts are available to viewers throughout Europe, but most services are scrambled because pay-TV broadcasters generally target specific countries and do not have the programme rights for the whole of Europe. Whatever happened to the laudable concept of "TV without frontiers"?
Despite the 1995 EU Directive on TV Standards stating: "All television services transmitted to viewers in the Community whether by cable, satellite or terrestrial means shall: ... if they are fully digital, use a transmission system which has been standardized by a recognized European standardization body", the fact is that digital TV markets in Europe involve numerous incompatible technical standards. How can this have happened?
The DVB Project has successfully produced specifications that have subsequently been formally standardized by the ETSI/EBU/CENELEC Joint Technical Committee on Broadcasting. As required by the TV Standards Directive, all digital TV services in Europe should conform to one or more of these standards. The problem is that the key part of the Directive is concerned only with "transmission systems". It states: "In this context, a transmission system comprises the following elements: formation of programme signals (source coding of audio signals, source coding of video signals, multiplexing of signals) and adaptation for transmission media (channel coding, modulation and, if appropriate, energy dispersal)". This definition excludes other key features of digital TV broadcasting, such as CA (Conditional Access), EPG (Electronic Programme Guide) and the API (Applications Programming Interface). All of these features are effectively "gateways" which can be controlled by a "gatekeeper".
Conditional access systems are essential for pay-TV operators to prevent unauthorised viewers accessing their services. In the mid-1990s, the DVB Project decided that it should not even attempt to agree on CA systems because several pay-TV operators wanted to control their own CA systems so as to prevent piracy and protect their revenue streams. Consequently, multiple CA systems are in use throughout Europe. Furthermore, despite DVB agreement on a Common Interface that would facilitate standardized receivers, many pay-TV operators still prefer to use embedded CA systems in "dedicated" receivers.
With so many channels available, the EPG becomes the crucial gateway to digital TV.
The positioning of "channels" on the EPG influences their success. Who controls the EPG?
Where a vertically-integrated operator controls the EPG, there is the risk that the EPG could be used to promote that operator's services to the disadvantage of competing services. Firm regulation is needed to ensure that EPGs are operated fairly.
An API is an essential ingredient of a digital TV system because it permits sophisticated EPGs and, more importantly, many new types of interactive services. Several APIs have been designed for digital TV, all of which are incompatible with each other. If a programme is to be shown in different markets, the interactive elements must be rewritten for each API (which is NOT a trivial task).
Although several APIs are available, the DVB Project decided to develop its own API: DVB-MHP. DVB-MHP 1.1 has recently been standardized as ETSI TS 102 812 and the full specification is freely available from http://www.etsi.org/. As DVB-MHP is based on Java, it can operate on many different types of set-top boxes, thus offering the prospect of interoperability with digital TV services using other APIs. There is growing support for DVB-MHP because it will encourage horizontal markets. Existing APIs will not disappear overnight because, in some countries (e.g. the UK), there are millions of set-top boxes using existing APIs. Even so, the Nordig Consortium (representing broadcasters, network operators and service providers in the Nordic countries) has shown that it is possible to migrate from existing APIs.
In March 2001, the EBU recommended that:
In those markets where pay-TV operators have subsidised the purchase or installation of digital TV receiving equipment, it could be argued that the pay-TV operators should be allowed to act in a "slightly" anti-competitive manner because of their need to protect their heavy initial investment. Although it is also often argued that subsidies are necessary to ensure the successful introduction of new technologies, none were needed for CD and DVD products. One explanation might be that CD and DVD products are more attractive than digital TV – but a more valid explanation is probably that both CD and DVD have the great advantage of being global standards based on horizontal markets, rather than on fragmented standards and vertical markets. In the last year, vigorous competition between manufacturers has resulted in very low prices for DVD players – and, hence, very rapid adoption of DVDs.
There is no doubt that subsidies have been responsible for the rapid adoption of digital TV in some markets. Nevertheless, we all recognize the truth of the old saying "there is no such thing as a free lunch". In the case of pay-TV, the operators expect to recover their subsidies from their subscribers.
Subsidising set-top boxes is a good tactic to initiate the market. It is an excellent tool for promotion of pay-TV services because early acquirers tend to be heavy spenders (e.g. those who will pay high prices for sports or movies). However, it is not a long-term solution. Some market research suggests that pay-TV is attractive to 30 – 40 % of the population, with the remainder being "slightly interested" or "not interested". By using various promotional techniques, it might be possible to persuade a total of 60% of the population to subscribe to pay-TV services. Some of these reluctant purchasers will be light spenders – and, hence, the cost of subsidies cannot be recovered quickly – or, perhaps, not at all. If the objective is to switch off the analogue TV broadcasts, we will need solutions that are applicable to the entire population, including the proverbial "grandmothers" – many of whom have no interest at all in digital TV!
It is worth examining experience in other markets, such as mobile telephones. The telecoms industry has long recognized the benefits of global interoperability. People expect their mobile phones to be able to call any telephone number in the world, even if that involves using the networks of other mobile phone operators. Few would buy a mobile phone if it could communicate only with mobile phones operated by the same telecom company! Yet, the broadcasting world still persists with the idea of service-specific digital TV equipment.
The mobile phone industry has also been grappling with the issue of subsidies. Large subsidies have been offered for mobile phones in many countries because the early adopters were often business users who used their phones intensively and were not concerned about the costs of their calls. As time passed by, the telecom operators found that an increasing proportion of the "almost free" mobile phones generated little revenue – because the purchasers were light users. Consequently, subsidies are now becoming much less generous.
Interoperability is a crucial requirement for the development of horizontal markets. Manufacturers benefit because of the economies of scale due to larger markets. Content providers also benefit because they can make content without concerns about lack of interoperability. Service providers and network operators gain access to larger markets.
Consumers benefit because they can select which service to watch, which equipment to purchase (and pay less!).
Digital TV can be based on either vertical markets (sometimes using proprietary technologies as barriers to trade) or on horizontal markets (using open standards to permit free competition between services). Vertical markets benefit pay-TV operators, whereas horizontal markets benefit free-to-air broadcasters, the consumer electronics industry and consumers.
Free-to-air broadcasters want to compete on the basis of their services, rather than using technological barriers to limit the consumers' freedom of choice. Experience shows that open horizontal markets benefit consumers – and, indeed, all other players.
Philip Laven
Director
EBU Technical Department
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