The regulation of interactive television in the United States and the European Union.

• Author: Galperin, Hernan

1. INTRODUCTION

   The broadcasting industry is rapidly entering the era of digitization, distributed intelligence, and interactivity. Despite lingering standardization issues, digital transmission is replacing analog transmission in the three major delivery platforms (terrestrial, cable, and Direct Broadcast Satellite ["DBS"]). Programmable user terminals built upon personal computer hardware and software technology are replacing "dumb" analog television sets. More importantly, after several failed attempts, interactive television ("ITV") services are finally poised for large-scale deployment. This transition opens many exciting opportunities for businesses and users, ranging from television-based electronic commerce (known as "t-commerce") to interactive educational programming. These new applications will evolve as broadcasters, software vendors, equipment makers, and users experiment with novel ways to enhance and perhaps transform the television experience altogether.

   These changes, however, have also raised several questions about who will shape the architecture of these emerging broadcasting networks, and hence determine business models, communication patterns, and the dynamics of technological innovation for the next generation of television. Will programmers or network operators alone decide which interactive services will be made available to users? Will electronic marketplaces develop as open transactional spaces or "walled gardens"? (1) Will users be able to connect new terminal equipment to the network and experiment with new network uses such as peer-to-peer applications? As they address these questions, policymakers face several pressing concerns. Who will create incentives for firms to invest in this infant marketplace and at the same time protect competition in services and applications, foster decentralized innovation, and secure users' access to a wide range of information and transaction services? Would ex ante regulation squelch the success of a sector that, after many failed attempts, now appears ready for prime time? What regulatory principles and tools should be used to confront the questions raised by ITV?

   Far from hypothetical, these questions have already surfaced in several high-profile cases, in particular the merger of America Online ("AOL") and Time Warner, which combined the world's largest Internet Service Provider ("ISP") and early entrant in the ITV market with the United States's second-largest cable operator and major worldwide programmer. In reviewing the merger, the Federal Trade Commission ("FTC") and the Federal Communications Commission ("FCC") found that the combination of distribution facilities, service operations, and content held by AOL/Time Warner raised competition concerns in three markets: broadband Internet access service, broadband Internet transport service, and ITV. While regulators imposed several merger conditions relating to broadband Internet access and transport services, those relating to ITV were, in comparison, rather minor.

   In this paper we analyze the development of ITV in the United States and Western Europe and the policy debates that have accompanied it. We argue that despite the nascent character of the market, there are important regulatory issues at stake that will determine the future architecture of this new information distribution platform. In most local markets, cable operators function as monopolies. There is evidence that even in markets where competition exists, it does not significantly affect cable operators or the rates they charge. (2)

   Absent rules that provide for non-discriminatory access to network components and a degree of standardization for terminal equipment, these platform operators will have strong incentives to leverage their ownership of delivery infrastructure into market power over ITV services and content. While in the short term, integration between platform operator, service provider, and terminal vendor is likely to facilitate the introduction of services, the lasting result could be a collection of fragmented "walled gardens" offering only the content and applications approved by the infrastructure incumbent. If ITV develops under such a model, the exciting opportunities for broad-based innovation and widespread access to multiple information, entertainment, and educational services in the next generation of television may never materialize.

   We recognize that given the incipient nature of the market, particularly in the United States, it would be premature for regulators to attempt to implement detailed industry-wide rules for ITV platforms and services. There is simply too much uncertainty about which services users will want and at what price, how the technology will evolve, and what business models will emerge. It could be argued that platform owners will have incentives to open their networks in order to stimulate the proliferation of content and services upon which they could levy a distribution fee. (3) The dynamics of market competition would then stimulate a migration from proprietary technologies and "walled garden" business models to open standards and interconnected networks, thus making regulatory safeguards less necessary. Experience to date with the development of ITV, however, is not encouraging in this regard. We contend that it is not too early to establish general rules and first principles against which market developments can be monitored. ITV provides another instance where digital convergence calls for adaptation of existing broadcasting and telecommunications policies to balance industry development with the economic and social benefits associated with open network access. The debate over broadband cable Internet offered a first approach to the problem and some important lessons. (4) While technologies may vary from case to case, ultimate policy goals should not.

   The case of ITV offers an opportunity to investigate how desirable policy goals--among them competition, broad-based innovation, and widespread access to information "from diverse and antagonistic sources" (5)--should be implemented in the post-convergence environment. In this Article we first review the evolution of the broadcasting industry through three successive models: the traditional "Fordist" (6) television model, the current multichannel television model, and the emerging ITV model. Second, we characterize the basic components of ITV and explore the concerns raised by the evolution of multichannel video programming distributors ("MVPDs") into ITV platform operators. Our conclusion is that dominant MVPDs are likely to have the ability and the incentive to leverage control over the transmission infrastructure into the ITV applications environment, engineering market outcomes in favor of affiliated programmers, electronic retailers, and ITV service providers. We note that, in contrast to the case of broadband cable Internet, the policy concerns go beyond infrastructure access control and include in particular the use of proprietary terminal equipment technology. Third, we review how regulators in the United States and the European Union ("EU") have so far responded to these concerns by contrasting two prominent cases: the AOL/Time Warner merger and British Interactive Broadcasting joint venture. We conclude that the wait-and-see approach taken by American regulators risks tolerating the deployment of a network architecture that could restrict competition in ITV services, hamper innovation, and leave second-class digital economy citizens with access to a limited array of entertainment, transaction, and educational services. We also note that the imposition of limited open-access requirements in the United Kingdom ("UK") market has hardly hampered investments in ITV. Finally, we outline a general framework for regulatory thinking about open network access that reflects the convergence of communications industry sectors and the need to integrate seemingly conflicting policy goals.

2. THE THREE GENERATIONS OF BROADCASTING

   The broadcasting industry has developed through three technological generations--each characterized by different types of services, business models, control strategies, and regulatory environments--as shown in Table 1. (7) It is interesting to note that each new generation has not thoroughly replaced the pre-existing industry structure, but rather added a layer of complexity to it. From the start of commercial broadcasting in the post-war period to about the mid-1970s, television consisted essentially of one-way terrestrial broadcasting of a limited number of channels that each aggregated and sold large audiences to advertisers. Their operators were protected by rules that restricted competition both within the industry and from new entrants. The regulatory model was based on the idea that broadcasters (both public and private) are trustees of a public resource (the radio spectrum) and thus under obligation to serve the public interest as defined by the government. While government protection from competition ensured the profitability of most broadcasting operations, fulfillment of public interest obligations was, at best, questionable. (8)

   During the 1970s, a series of technological and regulatory developments created the conditions for the rapid growth of cable, and later DBS These new platforms essentially offered more of the same service: one-way delivery of branded packages of television programming. A new business model emerged, however, based on the collection of payments directly from subscribers, spawning the growth of specialized channels with a limited audience base. (9) The regulatory model was fashioned as a mix of traditional broadcasting and utility regulation. Cable operators were for the most part granted monopolistic franchises by local authorities in return for payments and limited access obligations (the so-called PEG, or Public, Education and Government channels, and leased...