2 The nature and range of the reference
2.1. Chatline> and? Message services were defined by the DOT in his terms of
reference for/ this*inquiry (see Appendix 1.1). They are all premium rate services
(PRS> costing, more than ordinary local or trunk calls. BT bills the caller and
collects revenue as with ordinary calls but then passes on part of this revenue to
the service provider (SP). The SP provides the information and operates the
recordings-for message services or operates the chatline or other service. BT also
offers1 a 'managed service' in which the SP provides the recorded messages which
are then placed on BT machines. PRS are provided in the BT network through
the 'Derived Services Network'. A technical description of how services work
fe given at paragraphs 2.19 to 2.25.
Chatline services 2,2. Chatline services enable a caller to be connected to a number of other
callers for a group conversation. The identity of other callers is not known in
advance, which distinguishes the service from a 'conference' service which
allows group discussion on several lines specified in advance (a service normally
used for business purposes). Indeed anonymity is usually a condition of
participation on chatlines, with callers only allowed to give their first names (the
conditions for those using some chatlines are described in detail below at
paragraph 2.69). It is doubtless also part of the attraction of the service for many
callers. The SPs who operate chatline services limit the number of callers in any
particular group conversation, usually to no more than ten. Their equipment
allows them to monitor the conversations, speak to the group or to individual
callers and to cut off callers. The monitors of some SPs take an active role in
the group conversation when it seems necessary to stimulate conversation. There
are both national and local chatlines. (In the former group participants can come
from anywhere within the United Kingdom. In the latter callers come from a
particular locality.) The first and most successful chatlines were BT's own
'Talkabout' services. These have now been discontinued (see paragraph 2.10).
2.3. Message services cover a wide range of services. They exclude, for the
purposes of this reference, services where the message is provided 'free', ie for
no more than the ordinary cost of the call (some of these services are described
briefly at paragraph 2.35) and are confined to those services where the call rate
is higher than standard rates.
2.4. The services normally involve recorded messages. These cover a very
wide range of subject matter from information such as share prices, weather
forecasts and sports results, through news items about sports or other subjects,
to entertainments such as music, jokes or stories. Other examples include medical
information, horoscopes, and interviews with popular figures from the
entertainment world. There are also dating services where callers can listen to
information about other callers and arrange dates; services which give live
commentaries on sports events; and 'voting' services where television viewers or
newspaper readers can call to register a vote, for example on topical issues or
for contestants in talent shows. There are also 'interactive' services, involving
more sophisticated equipment, where the caller can choose different messages
using either Touchtone signalling or voice. Examples are share information
services and interactive 'adventure' games. The range of message services has
grown quickly and there is obviously potential for any new type of message
service that can be identified by SPs as likely to generate enough calls to be
commercially viable. Message services which have attracted a lot of business and
a number of complaints are in the 'adult entertainment' category.
2.5. 'One-on-one' services involve live conversation between the SP and the
caller, again with the condition, for the purposes of this reference, that the caller
is paying a premium call rate. Business and shopping information are examples
of services using the one-on-one approach.
2.6. The original chatline service, Talkabout, prompted the complaints which
led to the DGT's reference. It also served as a model for the chatlines currently
provided by independent SPs.
2.7. Talkabout was a 24-hour chatline service operated by BT, with one
service aimed at adults, the other at teenagers. It was originally launched in April
1983 and was suspended in February 1988. The services operated on 0055
numbers, and were based on regions. The cost of the services to callers was at
the 'a' rate (see paragraph 2.56), so that on average calls cost just over 5 pence
per minute. During 1987 the service received about 40 million calls and
generated gross revenue of about £5 million. 55 per cent of all calls were made
to Teenage Talkabout but the adult service generated 55 per cent of revenue. The
average call durations of the two services were 3!/2 minutes for Teenage
Talkabout (at a cost of 19 pence) and 6 minutes for the adult line (costing 32-5
2.8. There were a number of conditions and controls on the Talkabout service
(many of which have been adopted by current chatline operators). Callers were
not allowed to exchange phone numbers, or surnames and addresses. There was
a ban on unruly behaviour, unacceptable language or anti-social topics of
conversation. Callers breaking these rules were warned and, if necessary, cut off
by monitors. When callers got through to the service, they heard an introductory
message about cost and monitors interrupted callers every 15 minutes with a
reminder of the cost of calls. On the teenage line there was an automatic cut-off
after ten minutes.
2.9. Talkabout first came under OFTEL scrutiny in 1986, following
complaints about high telephone bills and media attention, particularly linked to
teenage use of the service. There were also allegations that Talkabout
conversations had become obscene, racist or threatening and that teenagers were
being put at risk by exposure to drug pedlars or by being enticed into meetings
with strangers. The monitoring was said to be ineffective at stopping these
abuses. In October 1987 a report by the Liverpool Trading Standards Officer
highlighted abuse of the service. BT investigated the Liverpool service and
agreed that the required standards were not being maintained there. Despite
various efforts to tighten up procedures in order to minimise abuse, complaints
2.10. In December 1987 the DOT pressed BT to introduce the measures of
contracting in and itemised billing. The DOT also commissioned a survey of
public opinion on the service (the findings of which are described in paragraphs
2.11 to 2.14). In February 1988 he requested BT to make the service available
only where the bill-payer had expressly requested the service (ie had 'contracted
in') and where itemised billing was available to show the service's costs. BT
considered that it was impractical and uneconomic to introduce the measures
proposed by the DOT; it decided to discontinue the service without further
contesting the DGT's request because of the public relations damage which it was
suffering. BT's views on the DGT's request and the reasons for its decision are
described in more detail in Chapter 5.
NOP survey 2.11. At the request of the DOT, NOP Market Research Ltd carried out a
public opinion survey about Talkabout in February 1988. The survey was carried
out by telephone with a wide coverage of areas in which the Talkabout service
operated. It was limited to people aged 30 to 60 to increase the chance that those
interviewed would have children living at home. A total of 1,010 people were
2.12. The survey found that few of those interviewed had used Talkabout.
Twelve of the adults said that they had used it at least once. Twenty-four
respondents said that their children had used Teenage Talkabout. These low
numbers, compared with a reported usage of 40 million calls in 1987, suggest
either an unrepresentative sample or that for adult Talkabout there must have
been heavier usage in age groups outside the sample frame, possibly among 20-
to 30-year-olds. For Teenage Talkabout the low numbers might suggest that use
amongst teenagers may have been greater than parents knew about (the 24
parents who knew that their children were using the service reported that only
five children had asked permission). None of the parents who had restricted their
children's use of the service thought that the restriction had been unsuccessful.
Thirteen respondents had noticed an increase in quarterly bills since their
children started using Talkabout. Five of these thought that their bills had
increased by over £40 a quarter, including one whose bill had increased by over
£160 per quarter.
2.13. Among parents whose children had not used the services 63 per cent said
that they would be unwilling for their children to use them, 31 per cent of parents
said that they thought Teenage Talkabout should be banned, 79 per cent thought
that it would be a good idea to limit its access to those people specifically
requesting it; 93 per cent thought it would be a good idea to show its cost
separately on bills.
2.14. The majority of the most clear-cut findings of the NOP survey relate to
Teenage Talkabout. A number of present chatline operators deliberately do not
target their services at teenagers. Most of the chatline operators we talked to said
that they took measures to ensure that teenagers did not use the lines, although,
of course, their procedures could not be foolproof. If teenagers phone ordinary
chatline services the cost is higher than for Teenage Talkabout, since such
services are now charged at the 'm' rate (see paragraph 2.56).
Role of BT as operator of 2.15. As the operator of the main telecommunications network in the United
network Kingdom BT plays a central role in the means by which all SPs convey their
services to the public. The activities of the other network operators are discussed
below (see paragraphs 2.26 to 2.32). Further, the particular form in which the
reference services are provided has arisen out of BT's development of the
Derived Services Network (DSN). Technical aspects of the DSN are discussed
at paragraphs 2.19 to 2.25. In addition BT is itself a provider of the reference
services through its business BTE Spectrum, which is described in paragraphs
2.47 to 2.52.
2.16. The Telecommunications Act 1984 abolished the statutory monopoly of
British Telecommunications; it was licensed as a provider of the national
telecommunications network in the United Kingdom and remained the dominant
provider of the telecommunications network. The licence was transferred to
British Telecommunications plc (BT) in August 1984. Mercury Communications
Ltd was also licensed as a provider of a public telecommunications network
throughout the United Kingdom.
2.17. Other licensed public telecommunications operators are: Kingston
Communications (Hull), whose system is confined to Kingston-upon-Hull and the
immediately surrounding area; the cellular operators, Racal Vodafone Ltd
('RacaT) and Telecom Securicor Cellular Radio Ltd ('Cellnet'—60 per cent
owned by BT); and cable companies, which provide cable television services in
their areas and are licensed to expand their networks to provide local voice
telephony in their franchise areas.
2.18. As the main operator of a telecommunications network in the United
Kingdom, BT has certain obligations, set out in its license under the supervision
of the Director General of Telecommunications (DGT) (see, for example,
Appendix 1.1 and paragraph 5.4).
Derived Services Network 2.19. PRS use the DSN, which was introduced as a means of providing
(DSN) automatic freephone services (where the cost of the call is billed to the called
party rather than to the caller) and PRS. The DSN involves special switches, lines
and logging units. Eight DSN switches are contained in nodes located around
Great Britain. These switches interact with the Public Switched Telephone
Network (PSTN) to make PRS and freephone available throughout Britain.
2.20. The DSN cost over £40 million. It was opened in April 1985, initially
only for freephone services. It was modified to enable it to carry PRS calls and
full national PRS became available in January 1986.
2.21. The way local and national PRS calls are handled is illustrated in
Diagrams 2.1 and 2.2.
Calls to local PRS 2.22. The 0 prefix in all local PRS causes the call to be routed to the parent
trunk switching centre (as for an ordinary trunk call). The next three digits in the
PRS number causes the call to be routed to the PRS switch unit. The rest of the
PRS number identifies the particular service which is being called (many SPs
provide a number of different services, each with a separate number). When the
call is answered by the SP, the answer signal is sent back to the parent trunk unit
to initiate charging at the appropriate premium rate.
2.23. The progress of the call is logged by a call-logging unit attached to the
circuits from the parent trunk unit. The logger records the details of the call, the
number dialled and the start and end time of the call and these data are stored
on tape for subsequent processing to determine the call revenue to be paid to the
SP. The data can also be processed to provide statistical information for the SP
such as the volumes of calls per day or the distribution of calls throughout the
day. Such information is particularly important for managed service customers
who do not have equipment on their own premises from which comparable data
can be extracted.
Calls to a premium-rate 2.24. Again the initial process follows the normal path for a national call-up
national service to the parent trunk unit but, on recognition of the 0898 digits, the call is routed
into one of the eight nodes of the DSN. On receipt of the routeing digits from
the originating trunk unit, the DSN switch determines the location of the SP
which will either be a direct connection off the same switch or a direct connection
off one of the other seven switches in the network. Each DSN switch is directly
connected to the other seven switches so the call can be routed to the SP either
directly or via one more switch at the most.
2.25. Call-logging units log details of all calls as they enter the DSN in a
similar way to the process on the local service. The call-logging data are collected
daily and sent to a central computer centre for processing to produce statistics
and SP payment details.
CALL ROUTEING FOR PREMIUM RATE NATIONAL SERVICE
— Local line
— Local Exchange
— Junction route
— Trunk route
— DSN node
— Call logging system
— SP line
— Service Provider
CALL ROUTEING FOR PREMIUM RATE LOCAL SERVICE (LONDON)
0077 calls barred
0077 call area
— Local Exchange
— Junction- route
— Trunk route
— Local Premium Rate switch
- SP line
— Logging/billing system
— Service Provider
Role of Mercury and 2.26. Mercury Communications Ltd (MCL) is licensed under the 1984
others as network public Telecommunications Act to run a fixed link telecommunications system. It has
telecommunications installed a trunk system around Britain and local cable networks in London,
providers Manchester, Birmingham, Edinburgh and Bristol. It is interconnected with the
other network providers mentioned above, so as to ensure that calls can be made
from one system to another (the 'any to any' principle).
2.27. Mercury has about 18,000 customers. Many are directly connected to
the Mercury system. Others are indirectly connected, in that although directly
.connected to BT they have contracted with Mercury so that their trunk and
international calls are routed via the Mercury system.
2.28. Mercury's network of exchanges is entirely digital. One consequence of
this is that it is able to offer itemised billing to all its customers. The routeing
of calls to SPs can involve the Mercury network as described below.
Calls from Mercury 2.29. BT is obliged to convey such calls under the terms of its Interconnection
customers to SPs Agreement with Mercury. The agreement does not provide for Mercury to
connected to BT collect charges for such calls and pass them on to BT and the SP. However,
Mercury is doing this under arrangements agreed with BT but which have not
yet been incorporated into a formal agreement. Mercury sets its customer tariffs
for such calls at a level which enables it to recover its normal cost-based charge
for its segment of the call, while also giving BT and the SP sufficient revenue
to ensure that they are remunerated at the same rate as if the call had originated
on BT's system.
Calls from BT customers 2.30. BT is obliged under the Interconnection Agreement to convey calls to
to SPs connected to SPs connected to Mercury. Revenue collection is not covered by the agreement
Mercury and Mercury has not been able to reach an arrangement with BT to cover it. As
a consequence there are at present no Mercury-connected SPs. The views of
Mercury on the reference are set out in Chapter 5.
Other network operators 2.31. There are no PRS provided on either the Cellnet or Kingston-upon-Hull
networks, although subscribers on these networks can access the BT PRS. There
are some SPs which operate from the Racal-Vodafone network, although some
of those giving evidence to our inquiry raised the question as to whether this was
permitted by the Racal-Vodafone licence.
2.32. Mercury and the other network operators above have agreed with the
DOT to accept modifications to their licences corresponding to any amendments
to the BT licence which may result from our inquiry.
Size of the market for 2.33. PRS have only been operating for a few years and their initial growth
reference services has been very rapid. This is illustrated by the figures for SPs, calls and revenue
2.34. The full national PRS facility was made available by BT in January
1986. The name 'Callstream' was adopted in June 1987. Prior to this BT had
started a local trial for PRS in London in February 1985 and some independent
SPs had begun local London services in November 1985. Chatlines had been
started earlier still, with a BT trial of its Talkabout service in Bristol which began
in April 1983. In 1987 several chatline sevices were launched to compete with
BT's Talkabout. BT withdrew Talkabout in early 1988 so that chatline services
are now only provided by independent SPs.
2.35. Prior to 1986 a limited range of recorded information services were
provided by BT at local call rates under the name 'Guidelines'. The service used
most was the 'speaking clock'; others included music tapes and sports
information. In 1983/84 these services attracted 460 million calls, of which 260
million were to the 'speaking clock'. The services were discontinued as PRS
were introduced. The only survivor is the speaking clock service, now known as
Timeline and charged at local rates.
2.36. Before 1987 therefore the industry was very small and not fully national.
Figures for BT's own SP, BTE Spectrum, are included in those quoted below.
The figures for numbers of calls and revenue to Talkabout, BT's chatline service
which ceased operation in 1988, are not included but are mentioned in paragraph
2.37. The number of SPs is now around 120, operating about 11,000 lines in
total. About 80 SPs operate national services, while about 50 operate local
services. There is some overlap, with firms providing both local and national
services. The number of lines grew from a few hundred in June 1986 to about
2,600 by June 1987, 6,500 by March 1988, and about 11,000 by June 1988.
There are about 700 lines in BT's managed service.
2.38. The number of calls made to SPs of both local and national services was
about 39 million in 1986/87 and 107 million in 1987/88. The figures by quarter
grew steadily from 24 million in Quarter I of 1987/88 to 30 million in Quarter
IV. There was a substantial jump in calls to 43 million in the first quarter of
1988/89. To put these numbers in context, the total number of national calls was
about 26 billion.
2.39. The figures for gross revenue show a similar pattern to that shown by
calls. Gross revenue is the total income generated by the calls (equal to the
amount paid by callers minus VAT) which is then split between BT as network
provider and the SPs. Total gross revenue was about £20 million in 1986/87, and
£67 million in 1987/88. There was a steady quarterly growth to £19 million in
the fourth quarter of 1987/88. The first quarter of 1988/89 (April to June) gave
gross revenue of over £25 million and BTs projection for gross revenue for
1988/89 is £131 million. BT forecasts that revenues will approximately double
in the next five years. An analysis of income generated according to type of
service is described at paragraph 2.67.
Relative importance of 2.40. Local services are provided in London and six provincial locations.
national and local services Calls to a SP in one of these locations can only be made from within the location.
There is no interconnection of these locations. Compared with national services,
local services are small in terms of number of lines, number of calls and revenue
generated. The total number of lines operated by local services was about 450
at the end of June 1988, compared with about 11,000 operated nationally.
Revenue to SPs from local services in 1987/88 was £4-4 million compared with
£37-1 million earned by national services. Work is currently under way to
enlarge the provincial catchment areas to create eight regions which would
provide complete but non-overlapping coverage of the United Kingdom.
Distribution of calls by 2.41. The price of PRS to callers differs between peak and off-peak periods
time of day (38.pence per minute peak, 25 pence per minute off-peak). Data for the quarter
to June 1988 show that calls were split approximately 50:50 between peak and
off-peak periods. Some services by their nature will be used during the peak
hours (eg share prices, midweek horse-racing or cricket commentaries) while
others will be used outside normal working hours (eg weekend sports
2.42. The present differential rates for PRS were introduced in November
1986. Before this date the price differential between peak and off-peak periods
was larger (rates were 46 pence per minute peak and 23 pence per minute off-
peak). In 1986/87 the split of calls to PRS was 60:40 as between peak and off-
peak periods. The shift away from the peak period has been attributed to greater
promotion of the off-peak periods by SPs. This stemmed from a change in the
structure of royalty payments, giving SPs greater incentive than previously to
promote off-peak use of their services. The details of the structure of royalty
payments are discussed in paragraph 2.59.
Average duration of calls 2.43. For all PRS the average duration of a call was just under 3 minutes
(quarter to June 1988). In the corresponding quarter in 1987 the average call
duration was 2 minutes 25 seconds. There is insufficient evidence to establish
whether the increase between these two quarters is indicative of a trend—in the
other quarters of 1987/88 the average call duration fluctuated between 2 minutes
16 seconds and 2 minutes 42 seconds. We have no statistical information on the
average duration of the recorded messages provided by SPs. However, a number
of SPs said that their messages were almost all of a duration of 4 minutes or less.
2,44. BT categorises SPs according to what it understands to be the main type
of service offered. This categorisation is approximate but it shows that the
average call duration in the first quarter of 1988/89 was longest for the chatlines
category at 4 minutes 36 seconds. For dating services it was just under 4 minutes
and for general sports 3 minutes 50 seconds. These figures should be treated with
caution: in some quarters of 1987/88 chatline services' average call duration was
lower than the average for all services whilst figures for dating services have only
been available in the last two quarters. However, general sports services have
always had an average call duration longer than the average for all services. In
evidence to us a number of chatline operators estimated that their average call
duration was around 3 to 4 minutes. Depending on whether calls were made in
peak or off-peak periods a 4-minute call from a subscriber would cost £1 -52 or
2.45. Table 2.1 shows that in the first year of operation, 1986/87, the
Callstream service had a net revenue (net of royalty payments to SPs) of £8 • 9
million, representing a loss of £1 -6 million, a negative return of 10 per cent on
assets employed. In 1987/88 net revenue had increased to £25-7 million and the
service made a profit of £6 • 9 million, a 30 • 1 per cent profit on assets employed.
Gross revenue for 1988/89 is projected at £131 million, more than double that
TABLE 2.1 Profit and loss account—Callstream services
Total field costs omitted. See
Product management note on
UKC central expenses page iv.
Profit before taxation
Profit on net turnover (%)
2.46. The operating costs for Callstream relate to the technology by which it
is provided, explained in paragraphs 2.19 to 2.25. Because all Callstream calls
make use of the PSTN they are apportioned a cost which is half the full cost of
an average national call. This proportion is based on estimates of the average
distance that a Callstream call is carried by the PSTN. DSN costs are the share
of full DSN costs which can be attributed to PRS. (DSN is also used by Linkline
service where the subscriber to whom a call is made pays all or part of the cost
of the call). Costs of analogue equipment in the DSN are being written off over
three years; costs of digital equipment over five years. There are in addition
central overhead costs to be carried. BT estimates that, on the assumption that
traffic levels stabilise after 1988/89, the investment in DSN will generate an
internal rate of return of 19-51 per cent by the end of 1992/93. This is probably
rather less than the rate of return for BT on an ordinary telephone call. However,
if traffic growth were to continue after 1988/89, the rate of return could become
Operation of the services 2.47. BT is itself a SP, through British Telecom Enterprise (BTE) which is
BT as a SP part of BT's Communications System Division. Most of BTE's PRS are provided
through its division Spectrum.
2.48. As already mentioned in parargraph 2.34, BT introduced the first PRS,
with a local chatline service in April 1983 and a message service (Citycall) in
February 1985. BTE Spectrum has taken on and developed the earlier services.
At present it operates Citycall, a range of financial information services;
Supercall Sport, with sports news and commentary services; and Livelines, a
group of entertainment and advice services and a televoting service.
2.49. In addition BTE runs 'audioextensions'. These services, normally
associated with magazines, enable subscribers to dial an 0898 number for more
information on a chosen topic. BT also has 'one-on-one' services provided by the
Telephone Marketing Services (TMS) Division of BTE. So far, these services
have been used to provide information to callers about hotels and restaurants on
behalf of a BT client and, in a pilot scheme, to give information derived from
2.50. BTE Spectrum is currently the largest SP in operation in terms of
number of lines, calls and net income. All its services are national rather than
local. In the first quarter of 1988/89 its net revenue was 13 per cent of all SPs'
revenues. It receives its income in exactly the same way as the other SPs, based
on the number of PRS calls it receives.
2.51. Its relations with the division of BT which runs the telephone network
(UK Communication—UKC) are governed by conditions set out in its licence in
accordance with the Telecommunications Act 1984. These require BTE
Spectrum to operate without any cross-subsidy from UKC. UKC must not
disclose any information about customers to other parts of BT and it must not
treat BTE Spectrum preferentially to its other customers. BTE Spectrum told us
that it had similar problems to other SPs in acquiring sufficient lines.
2.52. Despite the measures that BT has taken to enforce these conditions, there
have been accusations from SPs that BTE Spectrum is in an unfairly
advantageous position. These views are covered in Chapter 4.
Contracts between BT 2.53. All SPs using Callstream enter into a contract with BT as the network
and SPs provider. Formerly there were separate contracts for SPs depending on whether
they were offering national or local premium services, or using BT's managed
service. Since April 1988 there has been one set of conditions covering all
uses of Callstream. SPs on the old contracts will be brought on to the nev
conditions. The main provisions of the Callstream condition are set out below
The contracts incorporate the relevant provisions of the Telecommunications Ac
1984, eg the transmission of messages that are 'grossly offensive, or of a
indecent, obscene or menacing character' is an offence under section 43 of th
2.54. Other contractual terms include the following:
— The customer must not provide services via Callstream which ar
unsuitable or likely to bring BT or Callstream into disrepute (suitability i
determined ultimately by BT).
— The customer must not provide information in the service which would b
a criminal offence or otherwise unlawful.
— BT has the right temporarily to suspend the service if the number of call
to a SP are of such a quantity as to cause exchange congestion.
— The customer must comply with the code of practice published by th
Independent Committee for the Supervision of Telephone Informatio'
Services (ICSTIS) and with any recommendation made by ICSTIS (se.
paragraphs 2.106 to 2.112). BT has the right to bar access to a service ii
the event of a breach and to terminate the contract for persistent breach
2.55. In providing its managed service, BT has the right to refuse informatioi
in messages which breach the provisions above relating to suitability or legality
Pricing of the services 2.56. The nature of PRS is that callers pay higher rates than for ordinar
inland phone calls. Currently, for national PRS services, the calls to subscriber,
are charged at the 'm' rate which is 38 pence per minute peak and 25 pence pe
minute off-peak (including VAT). National SPs therefore have no choice over th<
price at which their services are available to the public. Local PRS services cai
be charged at 'a', 'b', or 'm' rates. However, all local SPs except one, a loca
radio station, have chosen to provide their services at 'm' rates. The 'a', 'b' am
'm' rates are set out below in pence per minute including VAT.
'a' 9 3
'b' 13 7
'm' 38 25
2.57. Because of technical limitations BT only has five charge bands availabl-
for inland calls. Its choice of charges for the PRS was therefore limited to tries-
charge bands. The 'm' rate chosen for the national PRS is the highest of the flv;
rates and is also used for calls to mobile phones and calls to the Irish Republic
2.58. Technical developments will make more charge bands available i.
future (on current schedule by March 1990). There will then be 33 charge band
available, for all services including international ones, as compared with the 1
available at present. BT has not yet decided how the new charge bands will b
allocated to services when they are introduced.
Payments to SPs 2.59. For national PRS, the current royalty payment to SPs is 17-5 pence pe
minute (net of VAT), regardless of whether calls are made peak or off-peak. Fo
local SPs the payment is 21-5 pence per minute. Prior to November 1986
payments to national SPs were 50 per cent of gross revenue, ie 23 pence pe
minute for peak time calls and 11-5 pence per minute for off-peak calls. Thi;
gave SPs little incentive to promote off-peak use of services. A general tari^
revision in November 1986 resulted in a change to the royalty paymeii
arrangements and the fixed rate payment to SPs was introduced. This was par
of a wider BT policy to relate charges more closely to costs.
2.60. In effect BT sets the price at which national PRS services are available
to the public, within the technical constraints determining the limited number of
charge bands. It also decides the price at which it makes the Callstream facility
available to SPs. It thus determines the price of output for the SPs and the cost
to them of the essential technical means by which they deliver their services. SPs
can compete only on quality of service and through promotion.
2.61. In its pricing policy BT's aim is to achieve a reasonable rate of return
on its investment in the DSN. As has been mentioned in paragraph 2.46, on
certain assumptions about traffic volume, a rate of return of 19-51 per cent will
have been achieved by the end of 1992/93.
2.62. Because of the technical limitations on charge bands, BT's pricing
policy has been fairly easy to decide. Its adoption of the highest charge band
available, the 'm' rate, does not seem to have stifled strong growth. Similarly the
levels of payments to SPs seem sufficient to have encouraged a flow of new
entrants into the industry and considerable investment by existing firms.
Evidence from our survey of SPs suggests that profits and growth levels are
attractive for well-run firms (see paragraph 2.66 onwards).
2.63. It is not possible from the evidence of operations to date to make any
estimates of the price elasticity of demand for the reference services. When the
November 1986 price changes were introduced the availability of the reference
services was rapidly increasing. Evidence from BT and SPs is that promotion of
services plays an important part in their growth, so that off-peak use of the
services increased even after their price, relative to peak-time use, was raised.
2.64. SPs have said in their evidence that they would like to be able to compete
on price. In other countries, such as the USA, SPs offer services at a variety of
rates. It would clearly be to the consumer's benefit if such price competition were
to become possible.
SPs and economics of 2.65. The MMC undertook a survey of SPs to obtain information on matters
their services including the type of services provided, numbers employed and profitability. BT
also provided us with information on net income and the number of calls made
to each SP. Details of the survey results are given at Appendix 2.1.
Revenue and profitability 2.66. The data from the above sources show that over the past year 15 firms,
of SPs including BTE Spectrum, have earned net revenues of £1 million or more. At
least another 23 firms earned net revenues of £100,000 or over. A substantial
number of the remaining firms had not yet been operating 12 months, but their
quarterly earnings indicated that they could expect to earn at least £100,000 over
a full year. Many of the firms answering the MMC questionnaire were unwilling
or unable to give information on costs, so that our assessment of profitability of
firms hi the industry is based on partial data. However, the greater part of the
firms which did provide information were making healthy profits; in some cases
these profits were very high. About a third of all firms were making losses. The
industry is a new one which is providing services to a large but previously
untapped market; it thus exhibits both high profits for firms which have
established themselves quickly and losses for firms which cannot match the
efficiency or market appeal of the profitable firms. It has not been possible from
the data available to undertake an analysis of profitability by type of service
provided, although an approximate analysis by revenue generated is shown
Analysis of SPs' revenue 2.61. BT analyses its data on calls and revenue by category of SP. This is by
according to type of its own admission a very approximate classification since it depends on an
service assessment by BT of the SPs' service at the time they start operations. Some SPs
provide services which cut across categories. Others change the nature of the
services they provide and since they have no obligation to inform BT when they
do so they are not reclassifled. Aggregation of net income to SPs whose services
were mainly information services gave a total of £8 • 02 million in the first quarter
of 1988/89. This constitutes 43 per cent of the total for all services of £18-602
million. The SPs in these categories provided information such as share prices,
weather forecasts and travel news. The remaining SPs earned net income of
£10-582 million, 57 per cent of total net income. Their services included sports
information and commentaries, music and other entertainment and chatlines.
Within this total the chatlines category had a net income of £2-596 million (14
per cent of the total). Typically firms in the top ten for revenue provide both
information and entertainment services. Several of the top ten operate chatline
services. Of over 50 SPs which gave us information on their services, only seven
provided one-on-one services. In one case the service provided answers to
detailed trade queries. The others were conversation or advice services.
Costs of entry 2.68. Various estimates were given to us of the costs necessary to set up as
a SP. The cheapest way is to make use of BT's managed service where BT
provides and operates equipment on behalf of the SP. The SP need only incur
the costs of the rental of answering equipment and facilities, the provision of
recorded message or messages and the cost of promoting their service. BT
estimated that the minimum cost for equipment and line rental would be about
£5,000. The SP would also need to produce the messages and promote its
2.69. A number of SPs are members of the Association of Telephone
Information and Entertainment Providers (ATIEP). Three of the larger chatline
operators make up the Independent Telephone Chatline Association (ITCA). The
ITCA companies voluntarily operate a code of practice in the provision of their
services (see also Appendix 4.3). This has various provisions additional to the
requirements of the SPs' contract (see paragraph 2.54). They include:
— constant monitoring of conversations (Talkabout had only sample
— no chatlines or advertisements specifically aimed at teenagers;
— no under-18 callers allowed on chatlines (a call-back procedure to check
date of birth is used when monitors are suspicious);
— announcements every 15 minutes of rates of cost of calls; and
— cutting off customers who break rules.
2.70. ITCA also operates a compensation fund and has contributed towards
high bills incurred through use of its services when it was established that they
resulted from unauthorised use. ITCA proposed that its voluntary code should
become compulsory (see paragraph 4.22).
Numbers employed by SPs 2.71. From the returns to our survey of SPs we received notification of a total
number of employees of about 690 foil-time and 253 part-time. Although the
response to our survey was only 55 returns from the 99 firms identified as trading
in August 1988 we know that our returns covered most of the larger firms in the
industry (we established from BT's data on revenue that we had replies from
16 of the 21 firms with net revenue of more than £250,000 in the first quarter
of 1988). We believe therefore that a reasonable estimate of the range of total
full-time employees is between 750 and 1,000, with part-timers estimated to be
Users of the services 2.72. The call-logging equipment described in paragraph 2.23 does not record
total usage of PRS by individual subscribers. There is therefore little data on the
incidence of heavy use of the services. BT maintains a continuous sampling
procedure and has also commissioned market research on PRS. This research
gives some indication of the types of users of the services and of the incidence
of frequent users of the services.
2.73. The Total Information Exchange Sample (TIES) has a sample of
customers classified into broad types. Data from this sample in the four months
to May 1988 indicate that the largest category of calls made to PRS was
residential, comprising about 58 per cent of all calls. The other 42 per cent was
made by businesses, with small businesses the largest group amongst businesses,
accounting for 19 per cent of calls.
2.74. Amongst residential customers, a measurement of call frequency in the
month of May 1988 showed that about 8 per cent of customers made use of PRS.
The major part of this group, 7-4 per cent of customers, made between one and
ten calls. Only 0-11 per cent of total residential customers made more than 30
calls in the month. One caller (out of the sample of 12,000) made over 100 calls
in the month (344 calls at a cost of several hundred pounds). The average number
of calls per customer was 0-09. If the sample is representative of the whole
population (BT has 18-275 million residential customers) then more than 20,000
customers make more than 30 calls a month.
2.75. Use of the services had grown steadily over the four months of
measurement by 81 per cent in total for residential customers and by about 33
per cent for business customers.
Evidence of unauthorised 2.76. The DOT identified the major potential detriment to the public interest
use associated with PRS as the fact that they increased the likelihood of unauthorised
use of telephones. Although this risk had always existed with telephones, PRS
increased it both because they offered services via the phone which had never
been available before and because these services were charged at a premium rate.
BT's standard conditions for the provision of telephone lines to customers make
customers liable for all charges for calls on their line.
2.77. Unauthorised use in the home is most likely to be by children. In
businesses it is any use of the phone for personal purposes which is not permitted
by management. Certain services are likely to lead to the worst cases of
unauthorised use because they are virtually 'open-ended'. Chatlines are the
obvious example, but live sports commentaries and interactive games also share
the characteristic of being 'open-ended' in that access to the service can be
continued over very long periods. Recorded messages, by contrast, are rarely
more than five minutes long. As a caller would not be likely to listen to the
message over and over again this implies a natural duration to the call. The caller
could, however, call a number of different message services.
2.78. Some evidence of unauthorised use comes from complaints from phone-
subscribers, to OFTEL, to BT or to ICSTIS (see paragraph 2.109). There must
also be unauthorised use which never comes to light, either because the
subscribers have not complained or because they are unaware that unauthorised
use has been made of their phones, presumably because it is not of a scale which
leads to a noticeable difference in the quarterly bill.
2.79. BT provided us with a summary of 33 complaints about its own
Talkabout service relating to high bills, received at its headquarters between
April 1987 and February 1988. BT also undertook a specific sampling exercise
for us to estimate the total number of complaints it has received at both
headquarters and district level relating to PRS. Often the complaint arises
because the subscriber receives an unusually high bill. Investigation then
sometimes reveals that unauthorised use of PRS is the reason for the increase in
the bill. About 90 per cent of the complaints in BT's sampled areas came from
residential customers compared with 10 per cent from businesses. BT's research
led to an estimate that 7-4 complaints a month per million residential customers,
or 2 per cent of all complaints received, related to Callstream billing. These
estimates came from samples taken in the months of June 1987, December 1987
and June 1988. The June 1988 figure was higher than the earlier two months.
An estimate based on June 1988 alone would give an estimate of 10-1 billing
complaints a month per million residential customers. We can translate these
estimates into annual figures given that BT had an average number of 17-972
million residential customers over the three months, with 18-275 million
residential customers in June 1988. Based on the figures from the three separate
months, one could expect about 1,600 complaints in a full year (or 2,910 at the
upper 95 per cent confidence limit). Using the higher June 1988 figure would
give an estimate of 2,200 (or 4,870 at the upper 95 per cent confidence limit).
The average amount disputed in the cases sampled averaged £285 and the highest
amount under dispute was £1,892.
2.80. Most of the BT cases sampled were settled by the customers agreeing
to pay the bill. Any high bills caused by faulty equipment would already have
been identified and therefore would not be included in the above figures. The
majority of these cases can therefore be taken as examples of either unauthorised
use or of customers using PRS but not realising the cost.
2.81. Complaints made to OFTEL gave more details in a certain number of
cases. OFTEL received about 125 complaints relating to Callstream services
from the beginning of 1987 up to mid-1988 (see Appendix 3.2). The quarterly
bills involved ranged up to £1,450, with an average of about £300. The
customers' 'normal' bills were usually in the range of £60 to £90. In the vast
majority of these cases the high bills were linked to the use of PRS, either by
the subscriber or by another member of the household. In most cases the services
involved were chatlines (often the now discontinued Talkabout). A number of
recent cases of unauthorised use reported in the press have involved still larger
amounts, in one case approaching £3,000.
2.82. Very few PRS-related complaints came from the business sector. This
could be because there is little unauthorised use of PRS in business. Most
employees would find it difficult to engage in extensive unauthorised use of PRS
because of the presence of others and because of normal work duties; and a
number of large businesses have exchanges which enable them to implement call-
barring of PRS numbers. It may also be that because business bills are larger than
domestic bills unauthorised use would be less easily detected. Also businesses
may be more inclined to take on themselves the onus of preventing unauthorised
use of their phones, rather than complaining to BT.
Billing arrangements 2.83. BT customers receive their bills quarterly, with itemisation of different
calls only for operator-connected calls (the vast majority of calls made are
automatically connected). Thus unauthorised use of phones may go on for over
three months before the subscriber has any indication of the financial effect.
When the bill arrives, the only sign that unauthorised use has taken place is its
size compared with the subscriber's normal bills. If the bill is large in comparison
to previous bills, it is automatically kept back by BT for checking of the meter
reading before despatch to the subscriber. If no meter errors are found there
may be monitoring of the calls made to the line for a few days in order to identify
the reasons for abnormally high usage. One effect of the delay in despatch of the
bill can be to allow unauthorised use to continue on the line during the days in
which BT is checking the bill.
2.84. Bills are payable on demand; in practice reminders are issued.
Disconnection for non-payment would normally take place about five to six
weeks after despatch of the bill. BT customers can choose to pay bills by direct
debit, either through monthly budget accounts or quarterly automatic direct
2.85. When BT and a customer fail to resolve a dispute over a bill then the
customer may choose to go to arbitration. Very few such cases have involved
Callstream services; there were four in 1987 and two in 1988. In all cases
arbitration found in BT's favour but small ex gratia payments to customers were
paid by BT in three cases because of the delay involved in checking the bills.
2.86. BT has considered monthly, rather than quarterly, billing. The estimated
cost, given current metering technology, would be £300 million a year and
research suggests that this would be uneconomic from the customers' viewpoint
BT's plans for itemised 2.87. BT's licence places it under no obligation to introduce itemised billing.
billing However, it is currently implementing a programme involving exchange
modernisation, one result of which will be to make possible the introduction of
itemised billing. It is forecast that by the end of 1990 itemised billing will be
available to almost 90 per cent of London telephone customers and about 50 per
cent of BT's customers in the rest of the country, this latter percentage rising to
75 per cent by 1992. 100 per cent national availability would be achieved by
2.88. Itemised bills will provide the following information to the customer for
all calls of ten units and over:
— date and time of call commencement;
— destination of call; and
— duration and price of call.
2.89. The ten-unit (51 pence including VAT) threshold was chosen because
below this level of price the number of calls increases rapidly and would threaten
to overload the current exchange software. Also, BT believes that residential and
small business customers are more interested in itemisation by value of call than
by type of call. The 51 pence threshold would mean that PRS calls at the 'm' rate
of shorter duration than 1 minute 21 seconds peak or 2 minutes 2 seconds off-
peak would not be itemised. Average call durations of all PRS calls have been
longer than 2 minutes 14 seconds in the last five quarters (to June 1988). BT is
committed to reviewing the ten-unit threshold in 1990 when more advanced
exchange software will be available.
More frequent billing and 2.90. The introduction of digital exchanges and of BT's customer service
'exception' billing system could make possible a system of notification of customers whenever their
cumulative bill exceeded a predetermined amount, eg a certain percentage higher
than their average bill. This would be more effective than regular itemised billing
as a means of alerting customers of possible unauthorised use of their lines.
Digital exchanges would also facilitate regular billing at more frequent intervals
than quarterly. BT has not yet taken any decisions about more frequent billing
or about providing an 'exception' billing facility.
Present options for call- 2.91. Call-barring is the name given to prevention of calls from a line to a
barring and effect of new particular number or group of numbers. The crudest form of call-barring
technology equipment is a mechanical lock on a telephone, which bars all calls on the line.
In order to achieve more sensitive barring, eg to bar all trunk calls but not local
calls, more refined equipment is necessary. Greater refinement involves
'recognising' a greater number of the digits in phone numbers. Thus to bar only
PRS calls, but to allow all other calls, facilities would need to recognise four
digits, eg 0055, 0066, 0077, 0898, 0830, 0836. Barring of 0836 calls would also
entail barring of calls to cellular telephones. It might also be necessary to bar
international calls to avoid access to overseas SPs. The available call-barring
facilities are discussed below under the headings of network and customer
premises. Each section includes discussion of possible future developments in
Network: BT-controlled 2.92. This facility operates through the local exchange. On request from a
barring at exchanges customer the exchange bars calls of certain classes on that customer's line. On
electro-mechanical exchanges the only option for call-barring is to bar all
outgoing calls. On TXE4 exchanges only two classes can be barred, either all
calls or international calls. On digital exchanges five classes can be barred:
(a) all calls;
(b) national and international calls;
(c) international calls;
(d) operator calls; and
(e) star services.
2.93. Refinement of the present system would only be possible on digital
exchanges. New classes of numbers for barring could be introduced, eg a class
to include all PRS numbers. BT is committed to doing this. The earliest date such
changes could be introduced on System X digital exchanges is late 1989; on
AXE 10 digital exchanges late 1990. The percentage of lines served by digital
exchanges is currently 14 per cent, planned to rise to 43 per cent by 1990, 75
per cent by 1994 and 83 per cent by 1997.
Network: call-barring on 2.94. It would be technically possible to bar calls to PRS numbers by
the basis of tariff group allocating a new tariff group value to customers wishing to bar them. TXE4E and
category digital exchanges would be able to identify this particular tariff group value and
bar the calls. This means of call-barring would only be feasible when additional
tariff rates become available, in 1990 at the earliest (see paragraph 2.58) and
modifications to exchange systems' data and software would be necessary.
Network: DSN closed user 2.95. A facility should be available from late 1990 on digital and TXE4
groups exchanges to allow acceptance of calls by SPs from authorised numbers only.
However, for technical reasons the closed user group for any particular SPs
number would be limited to about 5,000. There may also be technical constraints
on how many SPs numbers could be included in such a scheme—this would only
emerge after technical discussions with the developer.
Barring by use of multi- 2.96. This facility is available on digital exchanges only. The customer also
frequency (MF) keyphones needs either an MF keyphone or a hand-held MF tone generator. The customer
can bar the same classes of numbers as for BT-controlled barring (see paragraph
2.92). Barring is done by keying in a PIN (personal identification number). The
proportion of domestic customers with MF keyphones is projected as follows:
2988/89 1989/90 1990/91 1991/92 1992/93
15 30 45 55 65
Network: longer-term 2.91. BT told us that it is not possible to obtain estimates of price and
options feasibility of longer-term options without putting detailed specifications to
manufacturers. The lead time on major developments from initial ideas to full
provision in the network is four to six years.
Barring at customer 2.98. A number of the range of switches available from BT and other suppliers
premises enable barring to be undertaken on private exchanges. The development of these
facilities is a function of demand in the business sector which is influenced by
the possible unauthorised use of phones at work.
Telephone locks 2.99. As already mentioned, the crudest form of telephone bar for domestic
use is a mechanical phone lock. For phones with a dial, small mechanical locks
costing a few pounds have long been available. The disadvantages are, first, that
the lock can be picked or broken, and second, that locks prevent any use of the
phone other than for the key-holder. Mechanical locks which allow 999 calls only
are also available for use with push-button phones.
Development of phone 2.100. BT estimates that if an existing phone model were to be modified to
locks incorporate a mechanical lock, the likely time-scale to introduction would be 12
months and about £10 would be added to the unit cost. If an existing product were
modified using a software lock, ie a PIN, development would take about 18
months and the additional cost per unit would be about £6. Prices to customers
would increase by £12 to £15 per unit.
2.101. A call-barring unit which is installed into the phone socket is currently
available at a cost of £43 plus VAT. Manufactured by Telspec, it is fully
approved for connection to the network. The current model needs to be wired in
by BT (at a cost of £25 plus £1 quarterly maintenance). A plug-ended version
is to become available which will not incur installation charges; it would plug into
and be locked on to the standard BT socket. The Telspec unit is operated by a
key and can have a different number of pre-programmed settings. For example,
one model has four settings:
(a) allows all calls;
(b) bars international calls;
(c) bars international and trunk calls (including Callstream); and
(d) allows only 999 calls.
The setting can be changed with the key.
2.102. A household with more than one plug-in socket would require a wired-
in or lockable unit for each socket for barring to be effective.
Phones with built-in 2.103. Call-barring telephones have been offered by BT in the past. They have
barring facilities cost significantly more than the standard product and demand has been around
10,000 to 15,000 units annually. To put this in context, the total number of rented
telephones is estimated to be 24-8 million in 1988/89; the total demand for new
phones, both rental and retail, is estimated at 4,580,000 units for 1988/89. BT
does not currently offer call-barring phones.
Possible developments 2.104. Call-barring telephones could be developed to offer barring at six
(a) barring all calls except 999;
(b) barring all calls except 999 and numbers programmed into the memory:
(c) barring all '0' level calls (ie all non-local calls);
(d) barring selected 'area' or 'service' codes ('area' codes identify an area in
inland trunk calls; 'service' codes identify services such as Callstream);
(e) barring selected single numbers; and
(/) switching the phone between ordinary and payphone use.
2.105. BT advised us that all the above options are technically feasible but
would require development and engineering design work. Before this is done it
is not possible to give estimates of cost and development time-scales.
Control over content of 2.106. ICSTIS was set up in August 1986. BT and ATIEP, the message SPs'
services trade association, had agreed a Code of Practice for PRS at that time and wished
The Independent that the application of the code should be carried out by an independent
Committee for the committee. ICSTIS was accordingly set up with BT finance and administrative
Supervision of Standards of assistance. The code gave guidance to SPs on the advertising, promotion and
Telephone Information content of services with specific advice on services containing financial, legal or
Services (ICSTIS) medical advice, 'adult' services and services aimed at children. The provisions
on advertising and promotion incorporate the Code of Advertising Practice of the
Advertising Standards Authority (ASA) and the British Code of Sales Promotion
2.107. The members of ICSTIS were chosen by BT in consultation with
ATIEP, OFTEL and the DTI. ICSTIS has been chaired from its inception by
Louis Blom-Cooper QC. It currently has six members appointed in their
individual capacities. They are: Dr Howard Baderman, Consultant Physician,
University College Hospital, London, and a magistrate on the Juvenile Bench,
London; Presiley Baxendale, a practising barrister and ex-teacher; Anthony M
Fisher, a marketing consultant and member of the Advertising Standards
Authority; Hugh H Pierce, formerly Head of Local Radio and Assistant
Controller Staff Administration at BBC, now retired; Bill Heath, chairman of
ATIEP and director of a SP; and Noreen Manning, head teacher at a London
secondary school. In September 1987 ICSTIS introduced its own code, based on
the 1986 code, which forms the current basis of its role (see Appendix 4.1).
However, this code is being updated to take account of developments over the
last two years. It is intended that the second edition of the code will be ready for
publication early in 1989.
2.108. After discussion with BT in January 1988 ICSTIS' remit was
confirmed as covering the content of services that was in poor taste as well as
content that was offensive, and the ICSTIS Code of Practice is being revised
accordingly. A provision is built into the Callstream conditions of service for SPs
that they should comply with the ICSTIS Code of Practice (see paragraph 2.54).
The possibility of pre-vetting of service content was considered in 1987 but not
adopted since it was felt that this would be tantamount to censorship. Monitoring
of services on a random basis was adopted on 1 October 1988. BT is providing
ICSTIS with the facilities necessary to undertake this.
2.109. ICSTIS' procedures for dealing with complaints are discussed in
Chapter 4. ICSTIS received 121 complaints during its first 18 months of
operation (September 1986 to April 1988) and has received 102 complaints
between April 1988 and July 1988. It is now receiving about 25 complaints a
week. The ultimate sanction is the withdrawal by BT of access to the network
for services; 15 services have been removed from the network. In addition BT,
exercising its own managerial control, has turned down about 15 applications for
its managed service.
2.110. ICSTIS's role has been publicised through a press campaign in
December 1986. An information booklet supporting this campaign was requested
by over 1,000 members of the public. A farther publicity campaign is planned
to coincide with the introduction of a revised Code of Practice, scheduled for the
early part of 1989.
2.111. ICSTIS is funded by BT, being treated as a cost in Callstream's profit
and loss account. In its first two years of operation its annual cost was £100,000.
This is expected to increase to up to £250,000 in the year 1988/89 following the
establishment of a full-time secretariat in May 1988.
2.112 Mercury has said that it plans to offer PRS facilities on its network and
it would wish ICSTIS to monitor such services. Mercury would contribute to
ICSTIS costs. Some larger SPs have also indicated a willingness to contribute