The 1999 declaration
(i) The ACCC report
143 As previously mentioned, the 1999 declaration was made under s152AL(3) of the Trade Practices Act. It took effect on 8 September 1999. Shortly before that day, ACCC issued a 48-page document entitled: "Declaration of Analogue Subscription Television Broadcast Carriage Service: A report on the declaration of an analogue-specific subscription television broadcast carriage service under Part XIC of the Trade Practices Act 1974". The service the subject of the declaration was described in Appendix 3 of the report in this way:
"A service for the carriage, by means of lines, of analogue signals used for the purposes of transmitting a subscription television service from a facility owned, controlled or operated by a carrier or carriage service provider to any point on, or in, a line link, customer cabling, or customer equipment connected to that facility.
Examples of this service are the delivery of analogue signals used for the purposes of transmitting a subscription television service to:
(a) an end-user's television set;
(b) conditional-access customer equipment of an end-user, or potential end-user, of a subscription television service;
(c) a wall socket at the premises of an end-user, or potential end-user, of a subscription television service;
(d) a point on a line link from which a lead-in connection may be run to the premises of an end-user, or potential end-user, of a subscription television service.
For the avoidance of doubt:
(1) this declaration covers a service even if the service is not provided exclusively by means of lines, e.g. if it is also provided by means of conditional-access customer equipment;
(2) this declaration does not cover a service provided partly by means of lines where the signals are carried to the boundary of a telecommunications network by means other than lines, e.g. by means of radiocommunication, and
(3) customer equipment and customer cabling shall be taken to be connected to a facility if it is connected to a line connected to that facility."
144 It will be noted that this description contrasts in at least two significant respects with the description used in the 1997 deeming statement:
(a) it is confined to a service for transmitting a subscription television service; that is, it does not include a free-to-air service; and
(b) it does not include reference to any of the three optional adjunct services described in Attachment B of the 1997 deeming statement.
However, the declaration covers a service extending to any one of several end-points: ranging from a point on the line link leading to the end-user's premises to the end-user's television set. This means it not only covers that portion of the line link owned by Telstra Multimedia (the HFC cable) but, at least potentially, facilities owned by subscription television providers like FOXTEL and C&W Optus.
145 Having regard to some of counsel's arguments, it is desirable to summarise the report. It consists of seven chapters and three Appendices.
146 Chapter 1 of the report is an introduction that describes the course of the public inquiry that preceded the report. It appears ACCC commenced the inquiry on 23 December 1998. At that time it issued a discussion paper setting out what ACCC perceived as the main issues. Apparently, ACCC received numerous submissions, which it reviewed. It discussed specific issues with economic, legal and industry experts. In June 1999 ACCC issued a draft report which concluded that "declaration of the service would promote the long term interests of end-users". It will be recalled that satisfaction about that issue is a condition precedent to a declaration under s152AL(3) of the Trade Practices Act - see s152AL(3)(d) - although it was not relevant to ACCC's task under s39(5) of the Telco Act.
147 Chapter 1 of the report includes the following material:
"Following consideration of the information received over the course of the inquiry, the Commission proposes to declare an analogue-specific subscription television service limited to line links.
The Commission expects that declaration will influence the development of competition for subscription television services, primarily in those areas where a subscription television service using line links is currently operating.
Declaration of the subscription television service enables service providers to reach end users in order to deliver a wider range of services than currently available, and reduces the need for full duplication of communications networks.
The Commission expects that declaration of subscription television services will promote competition and provide end-users with the ability to choose between different suppliers of subscription television program packages, particularly in areas of niche programming." [Original emphasis]
148 Chapter 2 of the report describes the "declaration process" undertaken by ACCC. It contains a reference to the 1997 deeming statement and refers to concerns raised about its validity. The report says:
"The Commission considers that the existing service declaration is valid. However, in order to provide certainty, the Commission commenced inquiries into whether to declare 'analogue-specific subscription television broadband carriage services' and 'technology-neutral subscription television broadband carriage services'".
The report goes on to deal with a submission by Telstra as to the consequence of the 1997 deeming statement being valid:
"Telstra has argued that, given the Commission considers the original declaration is valid, it can only justify declaration of the proposed service if that would promote the long-term interests of end-users more than the original.
The Commission considers that the greater certainty provided by the proposed declaration would promote competition beyond the level that could be expected under the existing declaration. Although the Commission considers the existing declaration to be valid, the Commission considers that access seekers may be reluctant to seek to enforce their rights under it while there is uncertainty in the industry as to its validity. The Commission considers it unlikely that the advantages which might otherwise arise from increased competition would be realised in these circumstances.
The Commission considers that there is no legal impediment to the Commission declaring the proposed service while the existing one is in force. However the Commission would be concerned at any confusion which arose because of the existence of two declarations covering similar services. Given that the declarations are likely to overlap, the Commission intends to hold a public inquiry under Part 25 of the Telecommunications Act 1997 to consider revocation of the existing declaration".
149 The remainder of chapter 2 deals with two subjects: long-term interests of end-users and industry maturity. ACCC thought any declaration that is likely to result in the achievement of one or more of the objectives specified in s152AB(2) of the Trade Practices Act (which include "promoting competition in markets for listed services") "will generally promote the long-term interests of end-users". In relation to industry maturity, ACCC quoted some figures supplied by Foxtel: in the period since January 1995, when pay TV commenced in Australia, over 900,000 households had subscribed to pay TV. The national total pay TV penetration rate is 15%; the cable penetration rate is 9.5%. Forty-five per cent of Australian homes are passed by cable.
150 Chapter 3 of the report discusses, but rejects, the idea of declaring a "technology neutral subscription television broadband carriage service"; that is, a service described in terms sufficiently wide to cover digital services. It also revisits the argument about "bundling" and "unbundling" services that had been important in 1997. ACCC said:
"In developing appropriate service descriptions, the Commission considered whether to prepare service descriptions for individual elements or whether to bundle particular elements together. Unbundling services completely to their component elements ensures that access seekers need only acquire the individual elements which they want, but has the potential to increase costs for the access provider.
Access seekers provided a range of models in their submissions. These ranged from a service which consisted purely of carriage of broadcasting signals to a bundled or 'integrated' service which consisted of carriage, modulation and demodulation, encryption and decryption, installation and maintenance of set-top units, marketing, billing and revenue collection.
A number of submitters criticised the Commission's draft report for favouring a model of 'direct access' to customers, in which access seekers had a direct retail relationship with the customer. The Commission does not favour any model in particular. The service description, when combined with the access obligations in Part XIC of the Act, allows access seekers some flexibility in whether they acquire a bundled or an unbundled service. Direct access to customers is possible, under the declaration, if access seekers wish to provide services in this manner, but it is not mandatory.
In addition to the carriage service element, the Commission considered a Network Management Service that included conditioning of customer access equipment and maintaining a database of end-users. After considering submissions, the Commission considers that the standard access obligations imposed on access providers by section 152AR cover services ancillary to the carriage of pay television signals sufficiently to enable service providers to supply pay television content, if they obtain access to the proposed declared service. It is therefore considered unnecessary to declare the Network Management Service (included at Attachment B to the service description proposed in the Commission's discussion paper).
Of the services that together make up a subscription television service, the Commission considers that carriage, modulation and demodulation, encryption and decryption, installation and maintenance of set-top units would either fall under the Standard Access Obligations or be matters about which the Commission could make an arbitral determination under Division 8 of Part XIC of the Act. Access seekers are free to negotiate for the access provider to provide additional elements such as sales and marketing support, or retail services such as billing and revenue collection. Access seekers are not obliged to accept such services if they do not require them, and access providers are not obliged to provide them.
To ensure that deletion of the Network Management Service did not have the unintended consequence that the service description would operate to allow access seekers to have their programming carried only to existing pay television subscribers, it was necessary to amend the description of the carriage service (Annexure A of the service description included in the discussion paper). In particular, the service description was amended to apply to both the carriage of signals to the conditional access customer equipment of existing subscribers and also to potential points of interconnection with the access provider's cable network (to allow access seekers to connect up households that are not currently subscribers in order that the cable network can be used to deliver content to them). The Commission intends that there should be an obligation upon access providers to provide access to a service that includes conditional access functions performed by set-top units, where these are required by access seekers. The service description has been amended to make this clear.
The revised service description is at Appendix 3.
Submitters have raised questions about whether an access provider who provides a carriage service to a set-top unit, but who does not own the set-top unit, could be required to provide access to the set-top unit. The Commission considers that to the extent that access providers exercise control over set-top units, they will be required by the Standard Access Obligations to supply access to the units".
151 ACCC went on to say it preferred "the service description did not specify the identity of the access provider". It thought this approach best reflects the intent of the legislation and noted the provisions for exemption (s152AT) from a standard access obligation.
152 Chapter 4 of the report is entitled "Promoting competition". It is a lengthy chapter that sets out the substance of ACCC's reasons for reaching its conclusions. First, ACCC noted its obligation to consider "whether declaration is likely to promote competition in markets for particular services; namely, markets for carriage services or services supplied by means of carriage services", ACCC explained:
"In general, declaration of an eligible service is likely to promote competition where:
· the eligible service is an input used for the supply of carriage services or services provided by means of carriage services; and
· the supplier (or suppliers) of the eligible service has (or have) substantial market power which can be used to influence competition between suppliers of carriage services or services provided by means of carriage services.
This is because declaration constrains the ability of the supplier of the eligible service to exercise market power in respect of the supply conditions. This constraint on market power may enable more efficient competitors to enter markets for carriage services or services supplied by means of carriage services, win custom from less efficient competitors, and thereby promote competition in those markets).
These are not the only circumstances in which declaration is likely to promote competition.
To examine whether declaration would be likely to promote competition, often it will be appropriate for the Commission to consider the market in which the eligible service is or would be supplied in addition to the market in which competition would be promoted (where these are separate markets)."
153 ACCC referred to market definition principles, as stated in the Trade Practices Act and elaborated by the High Court in Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Company Limited (1989) 167 CLR 177. However, ACCC noted the limited relevance of market definition:
"In identifying relevant markets, Part XIC of the Act does not require the Commission to take a definitive stance on market definition. Furthermore, over time, declaration itself might affect the dimensions of these markets, particularly in relation to the functional dimension. Accordingly, market analysis under Part XIC should be seen in the context of shedding light on how declaration would promote competition rather than in the context of developing 'all purpose' market definitions."
154 After describing the elements of the service proposed for declaration, ACCC considered the proper identification of the relevant market. It did so by reference to what it called the "product dimension" (distinguishing cable TV from multipoint distribution systems (MDS)) and broadband wireless (LMDS), satellite, digital free-to-air and import competition. ACCC concluded that "all retail pay TV services are part of one market irrespective of delivery means". ACCC rejected the view that cinema, radio, newspapers, magazines and home video rentals are sufficiently close substitutes to be considered part of the same retail market as pay TV. ACCC came to the same conclusion, for reasons it gave, about free-to-air television, although describing this as "potentially the closest substitute" for pay TV.
155 Turning to what it called "the geographic dimension", ACCC indicated a view that "the most significant effects on competition of declaration would be felt in … the market for the supply of retail pay TV services in cabled metropolitan areas". ACCC said "(t)his is the geographic market for the supply of retail pay TV services which would attract the most interest from pay television service providers". It supported that statement by detailing present and proposed subscription services.
156 Under the sub-heading "Effect on competition", ACCC noted what it called "significant barriers to entry for carriage service providers". These barriers included not only economies of scale and the high sunk and fixed costs involved in cable deployment, and technical and economic difficulties associated with MDS and satellite transmission, but the fact that "most key sports and movie programming rights have been exclusively tied up by either Foxtel or C&W Optus". ACCC said:
"Compounding the delivery and programming constraints is the fact that the relevant retail pay TV markets in Australia are relatively small. The 6.2 million television households in Australia compare with 99 million in the US and 22 million in the U.K.
Because the most attractive programming is now held exclusively by Foxtel and C&W Optus on a long term basis, declaration would not be likely to result in competition in the mainstream of the retail pay television market. Pay television service providers would not be able to acquire the subscription drivers needed to compete effectively with Foxtel and C&W Optus for customers who subscribed on the basis of movies and sports."
ACCC then dealt with niche programming:
"In Australia, niche entry into pay TV markets has been generally achieved through suppliers of programming content compiling their own channels and wholesaling them to the existing vertically-integrated pay TV service providers for distribution as part of their branded packages. For example, the 'World Movie' service is distributed as a tier in the Foxtel and Optus Vision services. Dergat Pty Limited's 'Greek Australian Television' (GAtv) has recently been launched as a separate tier in the Optus Vision service.
TARBS entry has been unique in that it acquired its initial channel line-up and its MDS distribution network relatively cheaply from the receivers of Australis. The Commission understands that neither Foxtel, C&W Optus or Austar bid for the channels or the network.
Pursuant to s152AB(4), the Commission considered the extent to which declaration would remove obstacles to end-users of retail pay television services gaining access to those services. The explanatory memorandum adds:
… it is intended that particular regard be had to the extent to which the particular thing would enable end-users to gain access to an increased range or choice of services.
End users already have access to some niche programming through existing pay TV suppliers. …
The Commission considered whether declaration would lead to a more competitive situation for these niche services in terms of diversity and price." (footnotes omitted)
157 ACCC noted that, where "niche programs" have been available as part of the Optus or FOXTEL packages, this has been only on a "buy-through" basis at premium prices. Persons who wish to acquire niche programs must first buy a basic program package. ACCC commented:
"TARBS and other access seekers with similar kinds of programming submit that they have the potential to better serve the consumers of such programming by providing a wider range, more cheaply and with greater flexibility of packaging. In particular, subscribers would not be required to 'buy-through', with the attendant additional expense, but could simply subscribe to the channel or channels of their choice.
Having considered the submissions received in response to the draft report, the Commission's view is that acquiring services on a per channel basis would have limited advantages. In particular, the cost of providing access to households which did not subscribe to one of the existing retail pay television services is likely to be significant enough to make it commercially unattractive to access seekers for large scale deployment. In households which already subscribed to an existing pay television service, the costs of providing access would be less, but there would not be any advantage to consumers from avoiding the cost of a basic package.
The principle advantage of declaration is likely to be increased competition by niche service providers in those households which are already subscribers to an existing service. The problem that access seekers want to overcome is the lack of access to premium programming, which limits their opportunity to be the platform of first choice for a significant proportion of the market. Almost all submitters agree that there is consumer resistance to installing a second set-top unit in a household. Declaration would offer the opportunity for greater competition among niche services beyond the basic tier. It would also offer the opportunity of a wider range of niche services being offered, many of which are not currently available.
The Commission notes that competition at this level may offer trade-offs between diversity on the one hand, and more intense competition between similar services on the other. Given that access seekers tend to offer a relatively wide range of niche services, this would only become an issue where capacity is limited. Further, given the rights to which access providers and others are entitled under s.152AR(4) of the Act, no programming will be displaced in providing access.
The Commission considers that competition will be promoted to a noticeable extent. Consumers of niche services (particularly foreign language services) are widely spread throughout Australian society, and will be likely to benefit in terms of price, quality and diversity of services.
The Commission considers that declaration of an analogue pay TV cable carriage service would be likely to result in the achievement of the objective of promoting competition in markets for the supply of pay TV services in cabled metropolitan areas to a material degree through customers gaining access to a wider range of services.
In summary, it would be likely to promote competition because:
· the high entry barriers in the retail pay TV industry caused by delivery and programming constraints would be alleviated by requiring access to the existing Telstra and C&W Optus broadband cable networks [in areas in which market entry by another delivery infrastructure is least likely]
· niche pay TV service providers (as typified by TARBS, Multicultural Marketing Network) can offer an alternative range of programming to those offered by Foxtel and C&W Optus (which often offer the same niche channels)
The Commission considers that declaration would promote competition to a greater extent in single-cabled metropolitan areas than in dual-cabled metropolitan areas. The market structures of single-cabled and dual-cabled areas are similar but with the significant difference that single-cabled markets are more highly concentrated and far less competitive. Currently, competition only occurs at the niche end of the market and in those areas where MDS is receivable and TARBS competes with one or other of the cable services or the Foxtel satellite service. In certain areas there is currently no competition at all."
158 Chapter 5 of the report concerns "any-to-any connectivity". For present purposes, it may be ignored. Chapter 6 is entitled "Encouraging efficiency". It deals at length with a number of important considerations. I need do no more than quote ACCC's conclusion:
"In the Commission's view:
It is technically feasible for the subscription television broadband carriage service to be supplied and charged for. While there will be costs in complying with the standard access obligations, these costs are reasonable, and can be met by access seekers without affecting their commercial viability.
Access providers and access seekers can negotiate access prices which enable the access provider to earn a commercially acceptable return on investment. These prices would protect incentives for investment in alternative infrastructure.
Declaration of the subscription television broadband carriage service will enable service providers to make efficient decisions about whether to roll out alternative infrastructure.
Declaration of the subscription television broadband carriage service is likely to facilitate investment in telecommunications infrastructure by reducing the risks associated with entry, leading to more innovative services and greater competition on price and quality of service."
159 In the final chapter of the report (chapter 7 "Conclusions") ACCC referred again to the promotion of competition. It set out this conclusion:
"The fundamental argument put by submitters opposed to declaration of the analogue service is that regulatory intervention should only address clear market failure, and that no such failure is evident in any of the markets relevant to this inquiry. Telstra, Foxtel and Cable & Wireless Optus argue that the necessary conditions for the exercise of market power do not exist in these markets. In particular, they argue that there is no 'bottleneck' in the market for carriage of subscription television services, and that without such a bottleneck, there is no basis for the Commission finding that declaration would be in the long term interests of end users. Further, they argue that prices being charged are close to or below cost, so that no monopoly pricing is involved.
The Commission notes that there is competition between the major providers of retail subscription television services over cable. Nonetheless, the Commission considers that the structure of the markets is such that regulatory intervention is necessary. Each of the carriage providers has an incentive to restrict access to the infrastructure it controls, because of the vertical links between the carriage and retail pay television services. Subscription television services provided by access seekers over the cable infrastructure would compete with the retail services provided by the owners of infrastructure, or by companies in which the owner has a major shareholding. Submitters have described the difficulties they have faced in negotiating access to the cable infrastructure.
Because of their vertical integration with the retail pay television services, the carriage providers can restrict access to their cable infrastructure without serious penalties in terms of loss of wholesale business. In these circumstances, programming services that might otherwise compete successfully with existing retail pay television services or channels cannot do so effectively. The Commission considers competition in the retail pay television market would be promoted if such programming services were given the opportunity to be provided to customers. Therefore the key issue is not merely one of whether existing pay television charges are excessive, but whether there is sufficient choice of programming.
The Commission notes the submissions that draw attention to the costs to access providers and seekers that may accrue from declaration. Where such cost [sic] do arise, the Commission notes that access seekers have shown a preparedness to meet the reasonable costs to cable owners of providing the service.
The Commission would be concerned if declaration of the analogue service inhibited the deployment of infrastructure to deliver broadband services, including pay television. However, the Commission notes that the declaration of a similar service in July 1997 had no noticeable effect on the existing or proposed roll out of services. In addition, the regulatory framework provides for exemptions from the standard access obligations where this will promote the long term interests of end users.
In the Commission's view, declaration of the analogue specific broadband carriage service will promote the long-term interests of end-users of carriage services or of services provided by means of carriage services".
160 Appendix 1 of the report sets out the service description initially used by ACCC. Appendix 2 records the organisations from whom ACCC received submissions. Appendix 3 sets out the revised service description quoted in para 143 above.