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. …