Capitalising onConvergence

DELIVERING VALUE AND DRIVING GROWTH IN A DIGITALLY CONVERGED WORLD

Sponsored by:

Foreword

Contents

What is convergence?

Why does convergence matter?

How convergence ready is the UK?

How can we accelerate growth?

B

C

D

A 08

10

11

22

04

03

Executive Summary

Cap

italis

ing

on

Con

verg

ence

02

Intellect is the trade association for the UK hi-techindustry. Our membership comprises organisationsboth large and small from the UK’s informationtechnology, telecommunications and electronicssectors. Intellect is the body UK hi-tech companiesmust be active in to:

Influence Policy Improve Markets Enhance Business Performance

The Intellect Digital Convergence Council (IDCC)brings together representatives from the telecoms,IT, consumer electronics, broadcasting and creativecontent sectors.

For further information on convergence visitwww.intellectuk.org/convergence

Foreword

Around the world, countries are competing forleadership in the global knowledge economy. Successin this race will depend upon how quickly countriescan leverage the opportunities for innovation,investment and economic growth presented byconvergence. With strengths in telecoms, IT and thecreative industries; the right policy framework; and aconverged approach to regulation, the UK can be awinner. But competition is intense, and our globalcompetitors are moving at pace. The purpose of thisreport is to understand how the UK is performing interms of its convergence readiness and to identifywhat else can be done to move the UK into theconvergence fast lane.

Convergence between the telecoms, IT, consumerelectronics, broadcasting and creative contentsectors has long been talked about but it is nowstarting to have a real impact in the UK. It has thepotential to deliver an unparalleled degree of choice,flexibility and convenience to users (both consumersand businesses) in terms of the way in which theyaccess and exploit information, communication andnew media content, services and applications.

The UK has a solid base on which to build, in boththe production and consumption of digital servicesand the creation of an appropriate regulatoryframework. The purpose of this report is not tocriticise but to question what more could be done to move the UK forward. Despite importantinnovations, such as the establishment of Ofcom –which is starting to deliver real regulatory benefits - we cannot take continued progress for granted. Itis clear that there are some significant leadership,policy, regulatory and industry challenges that willneed to be addressed if we are going to leveragethe potential social and economic value ofconvergence for the UK.

To address these issues and inject further drive,optimism and urgency in moving the UK forward,Intellect established the Intellect Digital ConvergenceCouncil (IDCC) to benchmark progress and identifyopportunities for improvement. The IDCC hasbrought together in one forum, experts from acrossall of the converging industries and other key playerssuch as retailers. To ensure wide representation,companies outside Intellect’s membership have beeninvited to participate in the Council. In this, the firststage of the IDCC’s work, we have aimed to set thescene for further action by developing our answersto the following questions:

• What is convergence? • Why does it matter? • How convergence ready is the UK? • How can we accelerate growth?

This report addresses the key drivers and inhibitorsof convergence and identifies the ‘state of readiness’of the UK in terms of our current ability to achievethe significant benefits of convergence. We haveconducted a readiness gap analysis for each of thesix key convergence enablers: consumer awarenessand demand; device convergence; contentinnovation and investment; infrastructure innovationand investment; commercial innovation and thepolicy and regulatory environment.

Finally, we have proposed a number ofrecommendations for industry, Government andregulators that are designed to help the UK to delivermore value and drive growth. We believe that withsufficient commitment, these recommendations arerealistic, achievable and will benefit the UK. TheIDCC, in partnership with other organisations, willcontinue to drive and monitor our progress.

03

“With sufficientcommitment, theserecommendations are realistic,achievable and willbenefit the UK.”

Executive Summary

What is convergence?Digital convergence across the telecoms, IT,broadcasting, media, and content sectors offers the opportunity for companies and their customersto do things differently and has usefully beendefined as:

“the successful application of rich multimediaproducts and integrated services thatpreviously did not exist, or were providedseparately, from organisations across thetechnology, media and telecoms sectors”1

Digital convergence implies a world whereinformation and content are digitised, personalisedand accessible ‘on-demand’ via multiple fixed andmobile platforms and devices. A world where theuser is more engaged, actively contributing to andinteracting with services rather than simply passivelyconsuming them.

Within industry, a new convergence value chain isforming which spans a wide variety of sectors andspecialisations. This is leading to new commercialopportunities and threats. It also presents newchallenges to the existing regulatory and policyframework, much of which was designed for theanalogue world.

Why does convergence matter?Convergence has the potential both to create and todestroy value. Deloitte predicts that worldwide, itwill lead to $1 trillion shift in valuations andrevenues in the converging sectors by 20102. Assuch, it represents both a disruptive threat and ahuge opportunity for companies across a wide andfast moving sector of the UK economy.

With ‘end-to-end’ strengths in the hi-tech andcreative industries, the UK is well positioned to takeadvantage of the global convergence phenomenonand become a ‘net producer’ of convergenceproducts, services, content and applications, ratherthan a ‘net consumer’. However, global competitionis intensifying and several countries, including Japan,South Korea, China and India, are forging ahead tofulfil clearly stated objectives to become global leadersin broadband, hardware and software production.

The UK cannot afford to be complacent - there is alot to lose. The UK hi-tech sector generatesapproximately 9% of GDP. In addition the UK creativeindustries account for about 8.4% of GDP. The keyquestion is whether it is possible to accelerate thenatural evolution towards convergence. The UK mustaspire to do this if we are to be at the vanguard ofglobal economies that exploit the convergenceopportunity.

How ready is the UK?Overall, the UK is making good progress and hasstrengths in all of the key industries at the heart ofconvergence. It has a strong user base and it hasmade real progress in developing a regulatory andpolicy environment that supports investment andinnovation by the private sector. The challenge forindustry, Government and the regulators is to buildon this progress to ensure the UK achieves a worldleading position.

To assess the UK’s current ‘state of readiness’, andidentify what more could be done to advance theUK’s position, the report considers how far the UKmarket has progressed in each of the key componentsof convergence: networks, devices, content, userawareness and demand, the commercial environmentand the prevailing policy and regulatory environment.

Consumer awareness and demandConvergence begins and ends with the customer – their choices and preferences will shape theconverged world. UK consumers are open to newtechnologies and are enthusiastic adopters when theysee clear value and benefits. However, adoption hasnot been uniform and uncertainty about the valueproposition is limiting the addressable market. Changesin consumer behaviour are notoriously difficult topredict and are rarely uniform. There is currently adivide between the behaviour of the most digitallyliterate consumers and those who have not yet seenthe value of these new services or who do not have thebasic skills or confidence to use them. However, this islikely to narrow over time as the mass-market catchesup with the early adopters.

Cap

italis

ing

on

Con

verg

ence

04

1 www.deloitte.com2 Deloitte presentation to Intellect Consumer Electronics Conference – July 2005

Nevertheless, convergence brings with itfundamental social changes that will not be easy for all consumers to come to terms with. More canbe done to raise awareness of the benefits ofconverged services and products to consumers.Industry needs to articulate benefits rather thantechnology features and address concerns aboutcomplexity, usability, support, safety and security.

Device convergenceDevices are of critical importance to the user’sexperience of convergence. Despite considerableinnovation, further improvements are needed toimprove usability and reduce complexity. Secureinteroperability standards are being developed at aninternational level and the usability of devices willcontinue to improve through market led innovation.Despite the merging of previously distinct marketsand the bundling of products and services, there hasbeen no move to consolidate consumer supportprovision, which is critical to consumer perceptionsof the benefits of convergence.

Content innovation and investmentThe real value for the consumer is in content,applications and services. Consumers are keen toindulge their passion for content, which createsgreat opportunity in the converging market place.The challenge for industry is converting thisenthusiasm into revenue. To date, consumers haveoften been motivated to get online and engagedigitally by the opportunity to access free content.This needs to change. The value of content must be understood by consumers so that new businessmodels can evolve Industry must have confidencethat Intellectual Property will be protected.

05

Infrastructure innovation and investmentWith consumers demanding more immediacy andconvenience and the most attractive servicesbecoming increasingly bandwidth hungry,convergence will be inhibited unless infrastructurekeeps pace with, or even leaps ahead of, demandfor bandwidth. For the network operators, thecritical issue is whether speculative investment innext generation access infrastructures can bejustified. But, if we are to move into theconvergence ‘fast lane’, and accelerate the roll outof next generation networks and services, there is aneed to consider all options to minimise the risksinvolved in new infrastructure investment.

Commercial innovationThe process of convergence is disrupting traditionalbusiness models, which have previously definedsectors. This is leading companies to engage withnew players and enter into new alliances andpartnerships to exploit their core competencies andrespond to new sources of competition.Convergence is fragmenting mass-market audiencesinto niche communities, presenting a majorchallenge to traditional advertising and broadcastingbusiness models. In order for the UK to succeed,industry will need to continue to move away fromtraditional ‘vertical silos’ towards a more horizontallyconverged structure.

Policy and regulatory environmentA converged policy and regulatory structure coupledwith strong leadership for the converging sectorswithin Government is vital for the UK. Inevitably ittakes time to reorganise Government and regulationto take account of a more converged market.Despite considerable progress, some fundamentalstructural divisions still exist and fuel a silo approachto policy management that does not reflect theconverging market. This is compounded by thepotential for regulation to creep into previouslyunregulated platforms, which could stifle investmentin an already uncertain market.

RecommendationsThe best way to predict the future is to invent it. If the UK is to be in the vanguard of digitalconvergence, industry, Government and regulatorsmust continue to think and act in a more convergedway. Inevitably, any transition from one paradigm toanother will be inhibited by legacy structures,organisations and legislation that slow the pace ofchange. This is true in the case of existing industrystructures and relationships; Government policymaking and existing regulatory frameworks.

Fundamentally, progress can be made byrecognising that convergence is a horizontal issuewhereas industry, Government and regulators stilltend to be structured vertically. An increase indialogue between stakeholders to better understandhow industry is reacting to this change will be key.

The recommendations are addressed to industry,Government and Ofcom and have been developedto be realistic, achievable and to compliment otherrelated intiatives.

Cap

italis

ing

on

Con

verg

ence

06

Creating a more converged Industry

• Intellect to facilitate an on-going dialoguebetween players across the value chain

• Intellect to support targeted initiatives aimed at improving consumer awareness, media literacy and respect for the value of content and services

• Industry to simplify and converge support services for consumers

Creating a more converged Government

• Government, in partnership with industry, to build a better understanding of the impact ofconvergence and why it is important for the UK

• Government to streamline departmentalresponsibilities for convergence and provide clear leadership

• Government to improve consultation processes to ensure converged input and better policyoutcomes

Creating more converged regulation

• Ofcom to create a climate for investment in nextgeneration communications infrastructure

• Ofcom to ensure that regulation does not hinderinnovation in the development of legitimatecontent, applications and services

• Ofcom to improve consultation processes to ensure converged input and better policy outcomes

07

A What is convergence?

Triggered by the transition from analogue to digitalcommunications technologies, convergence isdriving rapid disruptive change across the globaltelecoms, IT, broadcasting, media and contentsectors which together are worth several trilliondollars. Fundamentally, digital convergence offersthe opportunity to do things differently and hasbeen usefully defined as:

“the successful application of rich multimediaproducts and integrated services thatpreviously did not exist, or were providedseparately, from organisations across thetechnology, media and telecoms sectors.” 3

Digital convergence implies a world whereinformation and content is digitised, personalisedand accessible ‘on-demand’ via multiple fixed andmobile platforms and devices. It also implies a world where the user is more engaged, activelycontributing to and interacting with services ratherthan simply passively consuming them. This isleading to a fundamental shift in the way thatconsumers interact, consume, perceive value in and pay for services. It is also leading to thefragmentation of audiences and, in some cases, the divergence of products and services to meetniche market requirements.

You do not have to look far to find examples ofconvergence happening today. Digital television is enabling previously passive audiences to interactwith linear broadcasting by pressing the ‘redbutton’. New on-demand services such as Sky+,Homechoice and the BBC’s online radio player areallowing people to time-shift their viewing andlistening and adjust their behaviour to suit theirneeds. Multi-channel programming allows people toparticipate in broadcast events either online or viatheir mobile phones. Ubiquitous digital camerasallow people to capture and share their experiences,from mundane images of daily life, to major worldevents, such as the devastating impact of the IndianOcean tsunami and recent terrorist attacks inLondon. Peer-to-peer networks are allowing peopleto share and distribute digital content – sometimeslegitimately, sometimes at the expense of theoriginal rights holders. New mobile TV services arebeing trialled that enable consumers to access TVservices on the move. Meanwhile ‘podcasting’ isenabling consumers to download content ontoportable devices and take it with them. Clearly,convergence has the potential to deliver anunparalleled degree of choice, flexibility andconvenience to users in terms of the way they access and exploit information, communication and entertainment.

Cap

italis

ing

on

Con

verg

ence

08

3 ‘Convergence is dead, long live convergence’, Deloitte

Content and Rights

• Video

• Music

• Games

• Associated rights Management

Content and Rights

Service Provision

• Internet Service Provision (ISP)

• Carrier Pre Select Providers

• Intelligent Network Services,

eg Call Forward, Calling Line IndentificationSource: Ofcom

Network Platforms

• PSTN • Network Equipment

• Cable Network • Network Protocols

• Satellite • Operational support Systems

• GSM • 3G

Application Service Provision

• Video Streaming

• VOIP

• Digital content distribution

Service Access and Navigation

• Handset

• PC

• PDA

ApplicationServiceProvision

ServiceProvision

NetworkPlatform

ServiceAccess andNavigation

The converging value chainAs the old vertical silos of the analogue world start to erode, they are being replaced by a newconvergence value chain, which spans a widevariety of sectors and specialisations. The range of players involved extends from small contentcreators to large network operators, from creativeadvertising agencies to small website developers,from gaming software developers to public servicebroadcasters, and from TV set manufacturers tomobile phone providers. The commercial relationshipsbetween these companies are changing as newinterdependencies and opportunities to competeemerge in the value chain.

“Players in the supply chain recognise thatconvergence offers a win-win for all. It is nota zero sum game. Through co-operation wecan overcome impediments to investment thatwill otherwise limit the benefits availablefrom convergence.”

With more players entering the market, newchannels emerging for competition and newinterdependencies developing, the commercialenvironment is becoming more complex, dynamicand uncertain. In some cases, this uncertainty hasled to inertia as companies with establishedbusinesses and vested commercial interests havestruggled to develop new sources of revenue whilemanaging the transition away from their establishedbusiness models. In some cases, this has allowedsmaller new entrants to move in, nevertheless, theyoften have the problem of finding a route to marketpast the established gatekeepers.

The most significant opportunities are likely to open up for the more innovative and fast movingcompanies, however, as was demonstratedthrough the years of the dot.com boom and bust,timing is everything and few companies are willingto move too far ahead of the demand curve. Newbusinesses will need to be established on robustbusiness models and the ability to respond quicklyto decisive moves in the market, and have theconfidence to take risks, is likely to be a key asset.

This changing commercial environment is, in turn,throwing up new challenges for Government andregulation. With convergence clearly critical to thefuture growth of the hi-tech and creative industries,policy makers and regulators have recognised theneed to modernise the regulatory environment tosupport innovation and investment. However, to dothis in practice, when the commercial environment is so uncertain, is extremely difficult. Policy makersare rightly concerned about the danger of ‘pickingwinners’ and are keen to maintain technology or platform neutrality. Yet at the same time,convergence is blurring the distinctions betweenmarkets and is challenging established regulatorynorms such as the broadcast watershed. Is it possibleto maintain distinctions in content regulationbetween linear and non-linear delivery models?

Convergence is also challenging the way in whichpolicy making is organised. For example, theestablishment of Ofcom as a converged regulatorhas yet to be mirrored by the establishment of asingle Government department, responsible for theconverging industries.

09

B Why does convergence matter?

Convergence has the potential both to create anddestroy value. Deloitte predict that, worldwide, itwill lead to $1 trillion shift in valuations andrevenues in the converging sectors by 20104. Assuch, it represents both a disruptive threat and ahuge opportunity for companies across a wide andfast moving sector of the UK economy.

With ‘end-to-end’ strengths in hi-tech and thecreative industries, the UK is well positioned to takeadvantage of the global convergence phenomenonand become a ‘net producer’ of convergenceproducts, services, content and applications, ratherthan a ‘net consumer’. However, global competitionis intensifying and several countries, including Japan,South Korea, China and India are forging ahead tofulfil clearly stated objectives to become global leadersin broadband, hardware and software production.

The UK cannot afford to be complacent becausethere is a lot to lose. The UK hi-tech sectorgenerates approximately 9% of GDP. In addition theUK creative industries account for about 8.4% ofGDP. Although there may be some overlap in thesefigures, it is clear that these converging sectors are ahighly important part of the UK economy. Clearly,these are the growth engines of the knowledgeeconomy. Both sectors are highly productive andinternationally competitive. According to theEuropean Commission the hi-tech sector accountsfor 40% of Europe’s productivity growth and the UKhi-tech sector has a higher level of labourproductivity than even the US hi-tech sector.5

With a worldwide reputation for excellence in thecreative industries including film, television, musicand games production and the advantages of theEnglish language, the UK has an opportunity tobecome a leader in the production of content forthis fast growing global market. In recent years, thecreative industries have grown at twice the rate ofthe rest of the economy and have deliveredsignificant net export earnings.

As the global knowledge economy takes shape, theUK can’t afford to lose its leadership position.However, without a strong domestic market, it willbe difficult for UK companies to compete effectivelywith the growing ranks of strong internationalcompetitors. Therefore it is essential that the UKkeeps pace with its major rivals in the developmentof convergence.

Cap

italis

ing

on

Con

verg

ence

10

4 Deloitte presentation to Intellect Consumer Electronics Conference – July 20055 Ovum: ‘Achieving the Lisbon Agenda: the contribution of the ICT sector’, p.24

“As the globalknowledge economytakes shape, the UK can’t afford tolose its leadershipposition.”

To understand clearly the actions we need to take toaccelerate growth in the converging sectors, we firstneed to analyse where we are today and assess theUK’s current ‘state of readiness’ for convergence.This analysis has been conducted across all of the sixkey convergence enablers; consumer awareness anddemand; device convergence; content innovationand investment; infrastructure innovation andinvestment; commercial innovation and the policyand regulatory environment.

Members of the IDCC have scored the importanceof these enablers, the market readiness of each andhave contributed qualitative analysis and quotedcomment throughout.

In terms of importance, infrastructure innovationand investment is ranked as most essential forsuccessful convergence, followed by deviceconvergence, content innovation and investmentand consumer awareness and demand.

In terms of readiness, commercial innovation is the area where it is felt most progress has beenmade, followed by infrastructure innovation andinvestment, content innovation and investment,policy and regulatory environment, consumerawareness and demand and device convergence.

11

C How convergence ready is the UK?

UK Convergence: Readiness Rating

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

Government & Regulatory 4.8

Commercial 5.8

Infrastructure 5.5

Content 5.2

Devices 3.7

Consumers 4.4

“To accelerate growth in theconverging sectors,we first need toanalyse where we are today”

C Consumer awareness and demand

“Consumers will determine the ultimate shapeof the converged world.”

Convergence will be dictated first and foremost byconsumer demand and consumers’ acceptance ofconverged digital technologies. UK consumers haveshown a readiness to rapidly adopt services once acompelling value proposition is developed. The totalnumber of broadband connections is approaching8m and new connections are running at 60,000 perweek. Consumers are switching to digital televisionmore rapidly than originally expected 6, and 3Gmobile services are now starting to take off. Perhapsthe greatest progress is in the delivery of onlinemusic services offered across the UK including AppleiTunes, Napster ‘To Go’, WiPPET and many others.Success has been so great that a UK download charthas been established and downloads often outsellphysical music singles.

“Consumers have already demonstrateddemand for the key components of convergentservices, such as newly established onlinemusic services, the internet, PVRs, video ondemand and mobile technologies such as 3Gand portable music/game players.”

However, consumer adoption, either of the differentconverging platforms, or across different social anddemographic groups, has not been uniform. There iscurrently a significant divide between the mostdigitally literate consumers and non-adopters. It isclear that some groups, particularly older people andsome socially excluded groups have a much lowerpropensity to adopt than others and this has led toconcerns about exacerbating social exclusion.

Key factors holding back adoption include: concernsabout the technical complexity of service and devicesand low levels of usability; concerns about a lack ofconsumer support when things go wrong; worriesabout safety and security online; uncertainty aboutthe relevance or value of services and a lack of basicskills and confidence in using technology. Marketdriven innovation will narrow this gap by makingthese services more compelling and simpler to use.However, Government and industry can also play arole through targeted collaborative action to raiselevels of awareness, access and digital literacyamongst the most excluded groups.

“There is a great case for Government and all parts of industry to work together on anawareness campaign to encourage broadbandtake up to build awareness of all the servicesusers could benefit from… you create demandby creating awareness, with the emphasis onpositive incentives for users.”

Meanwhile, the market must continue to meet the needs of the early adopters, influencers andinnovators as it will be these segments of the marketthat test, adopt, adapt and promote new productsand services for the benefit of the mass market.

Cap

italis

ing

on

Con

verg

ence

12

6 Currently c.14m despite forecast in 2001 of 7m by 2005 - see speech by Stephen Carter, CEO of Ofcom at OECD Convergence Conference 2-3 June 2005

Consumer Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

Although there is a strong willingness to adopt, it ismuch more difficult to predict what this will mean interms of changing consumer behaviour and sourcesof potential revenue growth. Convergence willempower the end-user with even greater choice andthe ability to try and test new services. It is likelythat consumers will be quick to switch to rivalservices if they perceive that greater value isavailable elsewhere. In a converged market, it isunclear how consumers will perceive value and whatthey will be willing to pay for. Most of the industrywas surprised to discover that consumers werewilling to pay up to £2.50 for a mobile ring tone oftheir favourite hit, yet were reluctant to pay morethan 79p to download the original track itself.

Many consumers were initially attracted to theinternet by the availability of free content. Thedevelopment of illicit file sharing services led to asituation where the widespread abuse of intellectualproperty rights was in danger of being regarded asacceptable consumer behaviour. This situation isnow starting to change, as legitimate high qualitycontent services have come online, and legal effortsto prevent piracy have been stepped up. However,further effort is required to re-establish a culture ofrespect for intellectual property rights whereconsumers clearly understand and respect thedifference between permitted and unauthorised use.

The safety and security of the devices and servicesare critical to the consumer experience andconsequent take-up of products and services.Consumers do not want their services interrupted byviruses, worms, hacker attacks, offensive or illegalcontent, spam, or the exposure of inappropriatematerial to their children. Tools are available to helpdefend against such threats, but these mustgenerally be put in place and configured to workwith the devices in use.

New converged devices and services will only beadopted if they offer benefits over existingtechnology and added value over traditionalmethods for accessing content and services. Themain enablers to increased adoption are likely to beease of use, good customer support, safety andsecurity. If products and services are too complex orif digital/electronic delivery is too slow, they will berejected by consumers.

13

C Device convergence

“Devices are at the forefront of the consumerexperience.”

Devices are at the forefront of the consumerexperience of convergence. Improved capabilities and falling costs of component technologies, such asmemory, batteries and flat screen displays, combinedwith improvements in the design and functionality of interfaces, has enabled the development of somevery successful products that have proved highlypopular with consumers.

“As people travel in their daily lives and movefrom place to place and country to country,there is an increasing requirement for thecontent which they hold to be ‘theirs’, andtherefore permanently accessible through a multitude of devices, connections andenvironments.”

The industry recognises that even the best devices stilloften fall short of consumer expectations in terms ofease of use, interoperability, reliability, security androbustness and these are all areas where industry isactively seeking to innovate and improve.

“ Industry will ignore at its peril the mainbarriers: complexity, usability, reliability,security and robustness.”

Reducing complexity to make products simple to useis a key challenge and depends on the developmentof better interfaces, very few consumers ever readmanuals. However, real progress on the usability ofdevices is likely to evolve as part of a natural marketdriven process, as we have seen with mobile phones.In a competitive market, companies‘ decisions ondevice design will be driven by market forces and the need to differentiate and are therefore difficult to influence.

Improved secure interoperability is also key. Not all products and services will interoperate, but thosethat are intended to, need to have ‘plug and play’performance, so that the technology gets out of theway of the consumer experience. Pervasive, robuststandards will allow content to flow across platformsto the desired destination and clearly enhance theconsumer experience of converged technology. Inmany cases this requires the development of openstandards and is an area where industry iscooperating with the international standards bodiesand solutions are being developed at a global ratherthan national level.

“A converged network delivers voice, data,video and other applications together toprovide business and consumers with a rangeof communications options that can bepersonalised for ‘anywhere, anytime’ secureaccess using ‘any’ communications device.”

Consumers are also looking for better reliability and performance. If devices are to become morepervasive, consumers will expect them to performmore like consumer electronic products than ITproducts. Consumers accept that their PC, used in a study or office, is likely to crash from time to timeand that it requires a boot-time and a cooling device.However consumers will be less likely to tolerate aliving room based product, offering multimediaservices, crashing or requiring boot time.

Cap

italis

ing

on

Con

verg

ence

14

Device Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

15

There is also a recognition that consumer support,both at the point of sale and after sale, lackscoordination across the value chain. If things gowrong, consumers can find it difficult to identify and access appropriate technical support and advice.Consumers currently have an array of sources tocontact if they encounter problems with atechnology or service and may be unclear as towhether to contact the device manufacturer, theplatform operator or the content provider. No one player in the value chain owns the supportrelationship with the consumer and there is nocoordination of information to ease consumerexperience.

Devices also have a role to play in supporting thedevelopment of a culture that promotes thelegitimate use of content and in helping keep userssafe and secure online. The appropriate applicationof Digital Rights Management (DRM) technology willbe critical to enabling easy legitimate access to, anduse of, content.

To differing degrees, industry is resolving theseissues - with, perhaps, the mobile market leadingthe way in delivering converged products andservices. True interoperability between devices maypresent an even greater challenge since it requirescollective action within the industry on aninternational scale to create the necessary standards.If industry, for competitive reasons, continues tofocus on the technology features rather than onpromoting the service or application benefits, wideruse might be inhibited.

C Content innovation and investment

“Quality content is key.”

Consumers are increasingly interested in the‘benefits’ provided by access to content and servicesrather than the ‘features’ of the technology. Accessto content over different platforms is improvingrapidly and market pressure is likely to continue to drive innovation in this area. A more significantissue arises from the potentially damaging precedent,set in the early years of the internet, that all contentcan be free. Many consumers regarded access to free content (especially music) as the ROI for theirbroadband connections and peer-to-peer file sharingnetworks were clearly a driver for many early adopters.

However, we must consider the opportunities forcontent creation, with the UK as a key internationalproducer, alongside the benefits for users/consumers.It is essential that consumers understand andappreciate the value of content; this must be doneby challenging perceptions that content is free. If theUK is to exploit its creative strengths, a culture mustbe created where content producers’ rights areunderstood, respected and enforced. Without such a culture, there will simply be no scope for on-goinginvestment in the content market as players will notbe able to protect their assets. The challenge is toharness consumers passion for content and developlegitimate services that meet user demand andencourage further investment.

“ It is important for users to understand thevalue of high quality content in this changingvalue supply chain.”

Content owners continue to grapple with theproblem of online piracy, which gained ground in the absence of legitimate services. The filmindustry estimated that it lost $3.5bn to internetpiracy in 20047, although recent reports8 suggestthat the situation is at last starting to improve withusers showing a willingness to pay for music content,such as iTunes.

“My online music service is fantastic. If I decide I want a piece of music, I can locate it, I canpay for it, I can acquire it and I can play it on several of my devices.”

All content owners envisage a future in whichconsumers can access content wherever andwhenever they choose within a marketplace that also provides for commercial competition andpayment. DRM should provide a balance, allowingcontent to be accessed on devices the consumerwants to use, whilst preventing massive quantities of content ‘leaking’ to form an unauthorised anduncontrolled ‘free-for-all’ that would cannibalise the legitimate market.

Cap

italis

ing

on

Con

verg

ence

16

7 Source FT April 20058 Report by Entertainment Media Research and Olswang FT June 2005

Content Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

Digital Rights Management (DRM) allows modelssuch as ‘a la carte download’, ‘subscription’,‘rental’ and ‘preview’ and differentiates thedifferent provisions of such alternative options.DRM provides a balance, by allowing differentservices at different price-points, while preventingunintended substitution among the service/price-point options. For this to work, consumer devicesneed to incorporate DRM support, to access theDRM content, and suitable content needs to be available.

A number of proprietary DRM options exist but areovershadowed by the lack of clarity with respect tolicensing and commercial sustainability in thesenon-standard implementations. A concerted effortby the industry will ultimately deliver the solutions – at this stage the primary need is for betterinformation on the current initiatives.

“Suitable protection for intellectual propertyrights serves to underpin incentives to invest in the kind of content that can really drive convergence.”

The public sector can also play a role in developingthe market for content and applications byencouraging the continued digitisation of contentand working with the private sector to developnew commercial applications. For example, therelease of land registry data has facilitated thedevelopment of new commercial services that havehelped to increase price transparency in thehousing market. There are many more exampleswhere access to digitised public sector data couldstimulate the development of new innovativeservices with real benefits for consumers.

It is essential that content owners receive faircompensation for their products otherwise the supplyof content will diminish. Moreover, the protection ofintellectual property is necessary if the creativecommunity is to be incentivised to make the requiredinvestment in broadband specific content – contentthat enables the consumer to fully exploit thecharacteristics of the platform. The availability ofcontent over many platforms has increased demandfor personalised content on demand and interactiveservices. This trend is driving the emergence ofprofitable niche market business models for industrywhich can be exploited if these barriers are addressed.

17

C Infrastructure innovation and investment

The importance of infrastructure as a key enabler isreflected in the European Commission’s i2010communication focusing on digital convergence:

“Objective 1: A single European InformationSpace offering affordable and secure highbandwidth communications, rich and diversecontent and digital services.”9

Penetration of digital platforms has grown steadily in UK homes and there is continuing industryinvestment in next generation networks, and in both fixed and mobile networks. However, it hasbeen argued that we are still not getting sufficientlyahead of the demand curve, particularly in the accesspart of any network – i.e. the actual physical linkwith an individual consumer. Any under-capacity inthis area is likely to constrain the development ofquality on-demand and rich media services.

For the network operators, the critical issue is whetherspeculative investment in next generation accessnetworks can be justified. There is uncertainty abouthow operators will recoup their investments and this is limiting the pace and scale of investment which, inturn, is leading to a focus on provision in areas withhigher population densities. In the same way thatcontent owners need to be fairly compensated, so docompanies that are involved in the high-risk area ofwide scale infrastructure provision.

The current position is not helped by the fact that thetelecommunications industry is only just emerging fromthe ‘bust’ phase of the dramatic over investment of thelate 1990s and will, inevitably, be cautious about thescale of investments in new infrastructure, particularly infixed networks where significant new civil works areinvolved. This is of particular concern to those whobelieve that the existing UK copper infrastructure maynot meet the requirements for many converged services,particularly on a universal scale. Whilst wireless basedtechnologies are seen as a real alternative, the availabilityof spectrum necessary to support the projected demandfor content-rich services also remains subject to doubt.

Market forces are driving limited fixed networkmodernisation and, although next generation mobiletechnologies are being rolled out, the lack of widespreadavailability is seen as the primary outstanding issue.

Moving to the convergence ‘fast lane’ means that weshould look to get ahead of the demand curve in the rollout of next generation access networks, in both fixedand mobile technologies. Such an objective impliesgreater risk and therefore there is a need for ongoingreview of the conditions that will ensure the necessaryinvestment in next generation access networks.

“There must be a rapid solution for facilitating thedeployment of next generation services.”

Options that need to be considered include a morefocused spectrum allocation strategy and more sharingof primary infrastructures, such as ducts and masts.

Cap

italis

ing

on

Con

verg

ence

18

9 i2010 - A European Information Society for growth and employment, SEC(2005) 717, COM (2005)229, 1st June 2005.

Infrastructure Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

C Commercial innovation

“A culture for convergence?”

Convergence can lead to the transformation of existingbusiness models across the value chain that embracesthe converging sectors. As services converge, andmarkets become increasingly contestable, there isclearly a tension between vertically integrated andhorizontal business models. New opportunities open up for competition but, in a converging market, itbecomes increasingly difficult to understand who iscompeting in what part of the market.

“ It’s not so much about barriers to convergence- it will continue to happen. Rather, thequestions are - who will be the beneficiariesof convergence, and who will be the victims?”

The increasing interdependence within theconverging sectors is making co-operation andpartnering a necessity but, in some instances, this is currently overridden by an inherent mistrustbetween companies.

“The rate of progress is slow because the variousindustries that need to work together in aconverged world have not traditionally workedand co-operated closely - e.g. telecoms,computing, entertainment, education andconsumer electronics. There is learning and a trusting phase that we are going through.”

In the light of this, companies collaborating andworking in partnerships where each brings their core competencies to meet market needs will be agrowing trend in the converged world, but today it is questioned whether enough UK based companieshave the commercial culture and mindset to exploitconvergence opportunities.

This is not to say that many existing business models within the converging sectors will not remain robust and profitable. The belief is that many companies will need to develop new models if they are to fully exploit the opportunities thatconvergence provides. For those who will need tochange to be successful, they will need to do so in a climate of uncertainty. Decisions will need to betaken on the most appropriate business models andwhich part of the value chain will hold the key toprofitability; i.e. what form will the next ‘killerapplication’ take?

If UK industry is to seize the opportunities thatconvergence presents, companies will need to partner and form alliances and to focus on their key competencies to ensure success. In other words,industry, as well as Government and regulators, willneed to move from ‘silo’ market sector structures tomore converged, horizontal organisations.

19

Commercial Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

C Policy and regulatory environment

“Digital convergence requires policyconvergence and a willingness to adaptregulatory frameworks where needed so that they are consistent with the emergingdigital economy.”10

In one respect, the UK Government has takenpositive steps towards a converged approach topolicy and regulation via the Communications Actand the creation of Ofcom, as well as the recentannouncement of the “Digital Britain” strategy.

The current division of policy responsibility betweenDTI and DCMS, perpetuates a vertical approach topolicy development. This is demonstrated by thestrategy for digital switchover being developedindependently of the strategy for broadband and the telecommunications sector.

Although Ofcom has been established as aconverged regulator, it has spent its first yearcarrying out separate strategic reviews intotelecommunications, broadcasting and spectrum – addressing the market vertically. The challengenow is to build on the conclusions of these reviewsand take a strategic approach to policy makingwhich recognises the dependencies between theseareas of policy in a converged environment.

Policies and regulation are still seen by many playersto either inhibit investment or impose unnecessarycosts on business and these concerns are emphasisedby the fact that the convergence market is anunsettling and uncertain place to be.

“Burdensome regulations and barriers will limitnew entrants, delay the introduction of newproducts and services to consumers, and stuntoverall growth.”

Players entering the market do so against abackdrop of larger players fighting hard to protecttheir established commercial positions in differentparts of the chain, whilst looking for opportunitiesto leverage their positions into new areas. It is also a more intensely competitive market place with anincreasing number of players interacting in a similarspace and across traditional boundaries.

One particular current complication in theconvergence world arises as a result of the samecontent being delivered via a variety of differentplatforms – which brings with it the question ofwhether the traditional content regulation applied to the broadcast sector should or could be extendedto other platforms, notably the Internet.

“The benefits of a global market place createdby the internet are not always understood.Convergence will create entirely new marketsand mechanisms.”

Cap

italis

ing

on

Con

verg

ence

20

10 COM(2005) 229 – i2010 A European Information Society for growth and employment

Government & Regulatory Readiness

0 1 2 3 4 5 6 7 8 9 10Marks out of ten

However, we cannot avoid a debate around the‘appropriateness’ of content and the need forconsumer protection against ‘the dark side of theInternet’. This perception of the internet will remainan issue and the industry has a responsibility topromote the range of tools, such as parentalcontrols, that exist to safeguard users fromexploitation. It should also look to improve self-regulatory mechanisms that address the wider valuechain, which may benefit from some consolidationamongst existing self-regulatory bodies.

The primary concern of industry is that, atGovernment level, there is a lack of understandingof the importance of convergence within the UKeconomy and society – and political vision andleadership is still seen as insufficent.

In addition, further regulatory intervention or ‘creep’is still considered as more likely than regulatorywithdrawal, and horizontal, non-sector specificregulation adds further barriers:

“Application of the EU Directive on financial services to mobile payment is more burdensome than specific electroniccommunication industry regulation.”

Whilst it would involve difficult decisions for theGovernment, industry sees strong and clear policyleadership, supported by effective, appropriateregulation, as a key driver towards a better, moreconverged future.

In parallel, there is a tangible need for industry to engage better with policy and regulatoryconsultations. Convergence requires far wider, more horizontal consultations and, in this period of uncertainty and change, the involvement at theearliest stage of consultation is vital.

21

D How can we accelerate growth?

The main barriers to more rapid progress resultfrom the fact that convergence is a horizontal issuewhereas industry, Government and regulators tendto be structured vertically.

To ensure that the UK’s progress towards aconverged world keeps pace with other leadingworld economies, we need greater convergence ofthinking and action within, and between, industry,Government and the regulators that impactconvergence.

As Stephen Carter, Chief Executive of Ofcom,commented in a recent speech11:

“ If, collectively, public policy is unwilling toaccept the consequences – good and bad –which flow from convergence then it isunlikely that it will produce holistic solutionswhich harness the good and mitigate thebad. Combine this with a degree oftechnophobia and slow policy-making andyou have a potentially dangerous cocktailwhere the cheaper labour markets combinewith the new infrastructure and technologymarkets to leave the western economies notbalanced by their checks and balances butlimited by them.”

The IDCC recognises that other initiatives exist toaddress some of the issues raised, such as thoserelated to the Government’s Digital Strategy, theCreative Industries IP Forum and the EuropeanCommission’s i2010 programme and these shouldget ongoing support.

The following recommendations have beendeveloped to: 1) Improve dialogue and co-operationacross the converging sectors; 2) ensure thatGovernment takes full account of the impact ofconvergence in its policy making; and 3) ensurethat Ofcom and other related regulators create aregulatory environment that supports the transitiontowards digital convergence.

Recommendation 1.

Creating a more converged Industry

By converged industry, we mean more co-operationbetween industry players in different parts of thevalue chain to deliver digital convergence with afocus on product reliability, device and serviceinteroperability, user support, content and IPprotection, payment systems, etc.

The IDCC recognises that many of today’s barrierscan, and will, be overcome by industry innovatingand evolving as part of a natural, market drivenprocess and will be driven at an international ratherthan national level. Specifically, major decisions onimprovements in the usability and interoperability ofdevices will, on the whole, be taken outside the UK– e.g. by major international suppliers andinternational standards bodies. However,improvements in some areas can be achieved on anational scale through more dialogue, new alliancesand greater co-operation.

A. Intellect to facilitate an on-going dialoguebetween players across the value chain.

Cross-sectoral dialogue around issues andopportunities within the value chain needs to beimproved in order that communication betweenindustry, Government and regulators covers the fullimplications and benefits of convergence. Greaterco-operation between players within the convergingsectors is a precursor to the progress of convergence.

Actions:

• The IDCC will continue to act as a ‘convergedforum’ for dialogue around emerging issues andconsultation with Government and regulators

• The IDCC will identify and develop innovativeapproaches to key cross-sectoral issues,particularly in areas of customer education andsupport

Cap

italis

ing

on

Con

verg

ence

22

11 OECD Roundtable on Convergence, June 2005

B. Intellect to support targeted initiatives aimedat improving consumer awareness, medialiteracy and respect for the value of contentand services.

The IDCC recognises the need (a) to extendawareness of the benefits of convergence to a widermarket, (b) to improve the basic level of medialiteracy skills across the UK population and (c) tocreate a culture of respect for the legitimate rightsof both creators and consumers of content andservices, including allaying consumer concerns aboutsafety and security.

Actions:

• In terms of increasing awareness, the BBC shouldbe encouraged to work with the industry toimplement a major digital literacy campaigntargeted at groups with low awareness of thebenefits of digital convergence

• The IDCC will review new opportunities, andsupport current initiatives, to improve medialiteracy, such as that being undertaken by Ofcom

• The IDCC will review new opportunities, andsupport current initiatives, to improve respect forthe rights of creators, such as that initiated byDCMS

23

D

C. Industry to simplify and converge supportservices for consumers.

The IDCC has identified a particular need to improvethe functionality, usability and robustness of digitaldevices and where appropriate the interoperabilitybetween services, but it recognises that progress inthese areas will be influenced most by how majorsuppliers and standards bodies address such concerns.

However, it does believe that it is within the scopeof UK industry to create an improved level ofconsumer support for converged devices.

Actions:

• Intellect will explore the creation of a voluntaryconsortium of major device and service providersthat will encourage interlinked and mutuallyaligned support arrangements to simplify thecustomer experience of convergence.

Such a consortium could consider the following:

– an industry Code of Practice to regulate conductacross the sector and protect the interests of allplayers

– a programme to move IT support from a cottageindustry to an effective support structure

– an accreditation standard for individuals whoprovide support services to consumers

– a “clearing house” facility for customers to callinto for support, and that will allocate work tothe nearest accredited person/company

– a simplification of the customer experience ofconvergence when making warranty ormaintenance calls to providers of devices andservices they have purchased

Recommendation 2.

Creating a more converged Government

To deliver converged Government, the IDCC sees aneed to review departmental structures to achievereal digital policy convergence as well as clearerpolitical leadership and recognition of the value ofconvergence to the UK.

The IDCC supports the conclusion of the EuropeanCommission in its i2010 Communication12, that“digital convergence requires policy convergenceand a willingness to adapt regulatory frameworkswhere needed so that they are consistent with theemerging digital economy” and assumes that theGovernment will engage fully with this programme.

A. Government, in partnership with industry, tobuild a better understanding of convergenceand why it is important for the UK

There is a need to improve understanding acrossGovernment of the impacts of convergence, in termsof both the potential social and economic benefitsto the UK nationally as well as its competitiveposition in relation to other international markets.

Actions:

• The IDCC to provide a forum for raising awarenessacross Government

• Relevant Government departments to engage withthe IDCC

• Government, in partnership with industry, to mapthe converging sectors

• Government, in partnership with industry, todevelop metrics to monitor growth of the UK’sconverging sectors and their interdependencies

Cap

italis

ing

on

Con

verg

ence

24

12 COM(2005) 229 – i2010 A European Information Society for growth and employment

B. Government to streamline departmentalresponsibilities for convergence and provideclear leadership

There is a need for an informed Government voiceon convergence issues at a senior level. Convergenceshould be at the centre of policy development andto do this effectively Government will need tochange the current vertical silo approach to policydevelopment.

Actions:

• Government to assign clearer responsibility andleadership for convergence issues

• Government to consider how to encourageconvergence across the broadcasting/creativeindustries and telecoms/consumer electronicsdivisions of DCMS and DTI

C. Improve consultation processes to ensureconverged input and better policy outcomes

There is room for improvement in the currentapproach to consultation with the converging sectorsat the policy proposal stage, such that the impacts oflegislative proposals are considered more horizontally.This requires a better reach across the convergingsectors when consultations are published.

Actions:

• Government to undertake a “concept viability13”style process to policy development that will alsohelp to inform subsequent regulatory impactassessments as to the affect on the convergingsectors

• Government to work with the IDCC and useconverging sectors map, as recommended underpoint 1, to ensure appropriate industry reach

25

13 Concept Viability is service offered by Intellect to the public sector. It enables public sector organisations to use industry as a ‘sounding board’at the earliest possible stage of project development, helping them to effectively assess the potential technological risks associated withspecific public sector IT projects, before progressing from concept to delivery.

D

Recommendation 3.

Creating more converged regulation

Regulators must continue to ensure that regulation - both sector-specific and non-sector specific -supports the transition towards digital convergence.

The creation of Ofcom as a converged regulator wasan important step forward. The IDCC welcomes itswork to introduce a more comprehensive analysis ofregulatory proposals and also its intent toprogressively withdraw from intrusive regulation.

A. Ofcom to create a climate for investment innext generation communications infrastructure

Because of the need for substantial investment in next generation infrastructure, both fixed andwireless, to meet demands for bandwidth hungryservices, the creation of a climate for investment innew infrastructure, particularly in access, should be a core policy objective.

Actions:

• The IDCC to work with Government and Ofcom to review options for increasing investment andinnovation in next generation access networks,including the extent to which sharing of someinfrastructure components, such as ducts andmasts, could increase availability

• Ofcom to review potential implications of currentspectrum policy with a view to assessing whethercertain spectrum should be allocated strategicallyrather than left to market forces

B. Ensure that regulation does not hinderinnovation in the development of legitimatecontent and services.

Regulation, both specific to the sector and non-sector specific, should, as far as possible, besupportive of digital convergence, particularly inrelation to the development of legitimate contentand services. Currently, legacy regulatory provisionsfrom different areas often conflict and this needs tobe addressed.

Actions:

• The IDCC to work with Government to identifypotential regulatory conflicts

• Ofcom to promote forbearance and support self-regulation within the content regulatoryframework, where the market can achieve thepolicy goal

• Ofcom, and other regulators, to consider newregulation only on the basis of rigorous impactassessment

• Intellect and Ofcom to establish how to approachemerging areas and establish effective models forself-regulation within industry

C. Improve consultation processes to ensureconverged input and better policy outcomes

The IDCC believes that the current consultationapproach is still too narrow and tends to result intelecoms and broadcasting issues being determinedwithout full assessment of the impact of proposalsacross the value chain. This is a difficult issue toaddress but requires industry to ensure that itengages effectively in the consultation process;Government to ensure it is consulting widely enough with stakeholders from across the wholevalue chain; and regulators to understand the widerange of impacts that interventions may have acrossthat chain.

Actions:

• The IDCC to review ways in which industry canpresent more co-ordinated messages

• Both Government and Ofcom to reviewconsultation processes with the objective ofachieving a better reach between sectors andmore proactive engagement of all potentiallyimpacted stakeholders

• Ofcom to undertake more rigorous horizontalimpact assessments

• Intellect to maximise the opportunity provided bythe Intellect/Ofcom forum to analyse and discussconvergence issues more comprehensively and toaggregate the views of the converging sectors

Cap

italis

ing

on

Con

verg

ence

26

T: 020 7331 2000 F: 020 7331 2040 E: info@intellectuk.org W: www.intellectuk.org/convergenceIntellect, Russell Square House, 10–12 Russell Square, London WC1B 5EE

Sponsored by:

Corning

Corning is a diversified technology company that

concentrates on high-impact growth opportunities.

Corning combines its expertise in speciality glass,

ceramic materials, polymers and the manipulation of

the properties of light with strong processes and

manufacturing to serve the telecommunications, flat

panel display, environmental, semiconductor, and life

sciences industries.

For more information visit: www.corning.com

Fuse PR

Commercial acumen and an outstanding technology

heritage enable the Fuse PR team deliver flexible, results

driven PR campaigns that rapidly raise awareness,

educate in complex markets and build a buzz about

our clients.

Technological development and commercial innovation

are breaking down traditional demarcations and

blurring vertical market sector boundaries.

A key challenge for the industry is to develop the

communications strategies and execute the campaigns

that effectively influence markets and ultimately help

convergence players sell products and services in a

highly competitive environment. Fuse PR is ideally

positioned to help companies do this.

For more information on Fuse PR call Philip or Blaise

on 020 8752 3200 or visit: www.fusepr.com