Types of convergence

Two types of convergence environments are generally recognized. Convergence in platforms is the most widespread type and permits consumers to access multiple services from a single platform. For example, cable television networks permit the provision of internet and telephony services in addition to their original business, which is the distribution of audiovisual signals. The integration of services in telecommunication networks also permits the distribution of video, in addition to traditional telephony and internet services. Mobile networks offer similar possibilities (see figure below).

Note that this movement toward business areas other than those operators originally adopted did not stem from regulatory changes but is rather a consequence of a technological shock.

Thus, as mentioned, we are advancing toward a future scenario of ¨everything on IP¨ type networks, in which the same infrastructures will serve to transport all types of information, regardless of their origin (voice, data, video, etc.).

Source. Observatorio de perspectiva tecnológica industrial. Spain

In a second recognized environment, this fusion of services is observed, which is known as equipment convergence. It permits users to access different services from the same device or terminal even if they are sent by different platforms (a mobile telephone which broadcasts radio, for example). Given the rapid technological evolution in this field, in the short and medium term, it is likely that an overlapping of functions will occur in the next generation devices, in which all or several services offered individually by each operator will converge. In addition, the need to access and transmit increasing volumes of information in contexts of mobility, in a continuous manner between different types of networks and in a fully transparent way for the user, demands the availability of mobile terminals that can operate with a variety of technological standards and platforms (Bluetooth, UMTS, Wi-Fi, WiMAX, DVB-H, etc.).

Source. Observatorio de perspectiva tecnológica industrial. Spain

Current technological trends permitting the commercial integration of communications, information and entertainment (or media) services are the result of two stages or ¨waves¨ of innovation.

An initial technological wave has to do with digitization, the subsequent use of computerization and the adoption of a language (or protocol) of interaction as the IP standard. In effect, digitization, when it ¨translates¨ all contents to a single format, regardless of their origin, permits operators to adapt distribution media to previously separate services, developing synergies throughout the value chain of the industry given that the product is essentially bytes of information.

Moreover, computerization is the logical consequence of digitization given that it is the ideal medium for processing content. In addition, its use plays a pivotal role by permitting a much more efficient administration of networks given its increased capacity to process information by time unit as compared with analog networks.

Finally, technology packets facilitate the use of digitalized resources and computerized networks by adopting an administrative system for shared information flows, permitting interoperability.

This first wave is definitely one of inventions or technological developments. The second wave is that of their mass application, in other words, transforming inventions into innovations, in addition to adapting other physical distribution media (especially wireless) to that end.

The spread of IP protocol as a standard in practically all infrastructures and services permitted the de facto separation of the transmission platform and the platform of services and applications. This event is known as the decentralization of ¨intelligence¨ (see figure).

For example, traditional telephony was a highly centralized technology in the sense that much of the functions and ¨intelligence¨ of the network was concentrated in stations and, consequently, usually administered by the network operator. Terminal equipment with limited functions was applied to this network. By contrast, in an IP network, no entity has complete control over the functions of the network and the ¨intelligence¨ is usually designed outside the network and applied at its edges, whether in the equipment terminals themselves or in alternative solutions. There no longer appears to be a network ¨dedicated¨ to a service but rather networks that act like multi-service platforms. Some of these networks may be provided by independent operators.

Currently, the trend is toward building networks based on packet transmission in accordance with IP protocol, regardless of the type of signals transmitted, enabling access to the ¨last mile¨ through different technologies. This takes maximum advantage of available resources and at the same time reduces exploitation costs.

International experience indicates that the nature of the telecommunications sector is already integrated with the media

The lack of identification among services and networks led some authors to eventually refer to network models in ¨layers.¨ In the traditional model, the telecommunication networks were vertically integrated and usually operated by the operator. The configuration of a network consisted of layers or levels, which led it to be known as the Layered Network Model. Traditionally, the value chain of the sector was organized in layers that were practically indissolubly linked. These existed in an environment of co-existing networks (mobile, fixed).

Interfaces between layers were technically standardized and commercially agreed upon by services. For example, a service operator contracted in the transport ¨layer¨ could rent optical fiber to different providers of that infrastructure service, even to its own vertically integrated competitors (that is, they had an available network and provided final services).

In the current technological scenario, operators of some final services do not need that contracting process to provide services because they can do so based on the IP network in a world where the ¨layers¨ are much more disperse than previously. This architecture allows service innovation to be a characteristic element, much more so than in traditional models.

Therefore, the change toward an IP environment tends to replace the vertically integrated change with an open horizontally integrated chain, although also with some degree of vertical integration (see figure below). An ¨open¨ network refers only to the capacity to provide multiple services in a common platform, in other words, without the absolute identification of the type of service or type of network.

As a result of this process, the structure of ICT industries and the boundaries between activities of the different agents involved (for example, telecommunication and radio broadcasting operators, suppliers of technology and content generators, among others) will have to be blurred once again in order to create alliances or new forms of competition between them, by attempting to cover increasingly large parcels of the value chain.

These explanations on the erasing of boundaries between ICTs are based on supply issues, that is, technologies. Nevertheless, demand equally accompanies the process.

The supply of multiple play services is growing rapidly around the world, eloquently showing that users value these offers and that their adoption favors the interests of these users. A preliminary interpretation is that this change merely reflects the fact that users also perceive that the distinctions between communication and media services do not justify their separate delivery when technology and commercial practices permit their integration.

The growth of commercial triple play services in developed countries confirms this; in other words, this business model has been accepted in regulatory terms. According to the ITU, there were nearly 90 commercial services by late 2006 (see figure). Examples include France and the United States, with at least five competitive commercial services apiece; and the United Kingdom, Japan and Italy, with three each. Spain has two competitive services.

Sources: ITU Strategy and Policy Unit. NGN and N-Play Services: Strategy and Policy Considerations.

Since there is technological integration between previously separate platforms and adoption from the demand of “multiple play” offers, there are fewer possibilities to question whether the correct definition of industry is different from those prevailing without such integrating trends.

Different sources confirm this trend to admit that the boundaries between communication and media industries become economically unjustified and, consequently, regulatory. For example, in a recent capital market report, the Deutsche Bank underscores that traditional distinctions are blurred in a converging market and that this erosion of barriers promotes competition (see table).

In the same sense, NERA (2006) indicates: “As convergence continues to blur, and even erase, the boundaries between several technologically distinct sectors, sector-specific regulations (such as those that emerged from the tradition of public utility regulation and were designed for natural monopoly environments) may become, at best, anachronistic and, at worst, irrelevant.”

A new industry, new relevant markets

Thus, given the new definition of industry, the prevailing competitive context must be different from those in force a few years ago because the possibilities for competition based on new technologies change the profile of market participants and allow the entry of other new ones. As a result of these changes, we may say that convergence drives a different definition of relevant market.

The concept of relevant market defines the competitive and rivalry context prevailing in an industry. In this issue of definition of market scopes or limits, there are in turn concepts that should be previously taken into consideration.

The definition of product: What is the product or service traded through ICTs? The definition of a product has a strong supply component because it is the supply which defines production conditions, the prevailing technology and its distribution media. As we explained, convergence makes a strong dissociation between the final service destination (or how it will be consumed) and the way it is physically delivered due to the new configuration in “layers”. With digitization, all contents produced and distributed through convergent networks have a common format. For that purpose, from the supply standpoint, the distinction is inappropriate. As a result of the aforementioned, sometimes it is mentioned that contents are “information assets” not differentiable in their physical provision and only distinguishable in their uses or in the type of information they carry. In one first approach, this would indicate that, based on the supply characteristics, we should talk about an industry of information assets and a unified market.

Obviously, the information content is absolutely relevant and distinguishable from the demand (for example, one byte of video is different from one byte of voice). That is, addressing the discussion from the consumer’s standpoint seems to lead to an opposite conclusion to that of the previous paragraph: products are distinguishable, despite the technological production and distribution mode, and not replaceable, leading in principle to different definitions of relevant markets. In effect, users demand “information assets” for specific purposes: communications, entertainment, etc., which meet different demands and, therefore, from that point of view, they should belong to or be categorized into different or diverging relevant markets.

Nevertheless, there is one characteristic of ICT industries that attenuates this divergence. From the moment different platforms can provide all types of “information assets” in a competitive manner under aggregated commercial forms or “bundles” and the demand adopts this type of provision, the definition of market tends to be convergent again.

The way to resolve this apparent contradiction is that, as a matter of fact, the aggregated commercial offer (for example, telephony, Internet and television) really creates a new relevant market and not necessarily replaceable to that of the isolated offer (for example, telephony). That is, there are two markets at once and which of them will be the “relevant” one will depend on the competitive conditions that may be analyzed and, basically, the adoption or not stemming from the demand of joint offers.

In summary, although the different types of contents provided are not replaceable with each other from the demand standpoint, in order to integrate them with a single definition of market, their integration from the offer and the growing acceptance of bundles as a practice suggest that they participate in the same relevant market or they create a supplementary market to those where the single offer prevails.

Even in the eventual cases in which the standard -or the jurisprudence- would adopt a “disaggregated” vision (for example, defining paid television, excluding telecommunication services, as a relevant market), convergence restrains the definition of relevant market from the offer replacement standpoint. This concept makes reference, in the short and medium term, to the capacity of new operators to enter the market, that is, it relates to the potential competition. Since it is possible to distribute contents that will replace pre-existing contents (in this example, audiovisual contents) through alternative media already installed, it is reasonable to deduce that those media are a replacing threat and, therefore, given their probability of entry, are part of the same relevant market.

That is, jurisprudence can assume a disaggregated version of relevant markets but cannot avoid that suppliers from other activities can be able to participate in the market in networks that were being used in other activities.

This issue on relevant and replacement markets, from the offer standpoint, in industries such as ICTs, has been addressed a long time ago by the European Commission, which is the supra-national competition organization of the European Union. One of the most important conclusions reached through a report prepared by consulting firm European Economics is that technology convergence allows creating a new joint commercial offer, which modifies the nature of the product itself thereby creating a new relevant market complementary or coexisting in principle with those already defined. If the demand trend is the migration to aggregated offers and the abandonment of individual offers, then the weight relating to this new market grows despite those where these disaggregated offers persist.

When commercial offers provide advantages to users, the process to create a new relevant market, which was already “technologically possible” from the offer, is inevitable. That is precisely the new definition explicitly adopted by some regulatory agencies (For example, Europe) or, as a matter of fact, by others (the United States) when accepting the provision of those offers by companies stemming from previously different activities.

We can focus this issue of relevant markets from an “organizational” perspective, in which it is shown that the technological change opens doors to modify the original activities of companies and to create capacities different from those that gave lieu to such organizations. This perspective suggests that communication companies mutate to companies that provide “information assets” and also to those companies that originate in the industry of the media that include communication services (particularly Internet), thus becoming companies that provide “information assets”. The table below shows the “core competencies” or original competencies of each distribution media.

Original competencies by technology

According to the new technological conditions, each operator “moves forward” on activities that do not constitute their core competition, thereby creating intermodal competition and, therefore, the weakening of barriers between activities and pure definitions of market.

The unavoidable consequence of these organizational changes is the redefinition of competitors in each activity, which naturally means that the definition of relevant market has mutated to a broader version, even independently from the exact regulatory definitions each country has.

Our region is of course not apart from this trend. Currently, there are cable TV companies that provide telecommunication services, such as traditional telephony, IP telephony and Internet. Moreover, energy-related companies are evaluating using their networks to provide services relating to these new definitions of market.

Original and acquired competencies by technology

In short, the communication and media market has indefectibly started a road towards service integration and where rivalry will intensely grow as regulatory standards adapt to this change. This will allow users to freely choose between operators, platforms and services.

We say that this road towards integration has already begun, particularly because there are already “double play” commercial offers between Internet services and audiovisual signals such as those provided by cable operators.

In this sense, it is possible to say that the Internet access provision market already shows full convergence because the sector legislation is open to competition, not imposing barriers to operators stemming from other activities, unlike the broadcasting market where its specific regulation does establish barriers.

Thus, the trend towards integration of services by platforms is already a reality and there are still regulatory barriers that hinder a final implementation by telecommunication providers.

Note of the Editor: in the next number of info @ CITEL we will publish the next part of this report.

Ignacio Luis Bergallo
Manager of International Regulations
Telefónica de Argentina