Ofcom’s ongoing review of the pay-TV market has entered a third phase. In its 360 page review of the process to date, the UK media and telecommunications regulator confirms its view that some sporting events and first run Hollywood movies are of sufficient value to warrant market intervention. It says that Sky is acting in an incentive to restrict the distribution of its premium channels, with knock-on effects for a variety of other platforms including cable, DTT and IPTV.
Opening a new consultation period, Ofcom has commissioned new research on the premise that Sky is making high aggregate returns, which are higher in its wholesale than retail business, and particularly acute in the distribution of first run movies.
The initial enquiry was sparked by a joint complaint made in July 2007 by BT, Setanta, Virgin Media and Top Up TV.
In forcing Sky to make the channels available on a wholesale basis, Ofcom says it has found the fairest remedy to broadcasters and consumers. “Ofcom believes that this remedy will enable other TV broadcasters to access and offer these premium channels, thereby promoting choice and innovation,” the regulator said in a statement.
“We do not believe that this proposed remedy would have a disproportionate impact on Sky, since we consider the proposed prices are above the level required to allow Sky a reasonable return on its content costs.” The proposal to force Sky to put a wholesale offer in place is not, says Ofcom, dependent on evidence of high prices.
A new issue raised by Ofcom is the exploitation of rights to subscription VOD. Ofcom says that although Sky has these rights it has chosen not to exploit them. The regulator wants to split subscription VOD rights from those covered under a standard subscription and is considering a reference to the Competition Commission.
Sky has reacted angrily to the proposals. In a statement, CEO Jeremy Darroch said the company deserved a fair return on its investment that created value for others. “Forcing Sky to sell its channels for less than their true value is a subsidy for companies that have shown no appetite for investment in programmes,” said Darroch. “BT and Virgin Media do not deserve to be handed a reward at Sky’s expense for their repeated failure to invest. It defies belief that Ofcom expects Sky to lower its wholesale prices to compensate for the higher costs of less efficient platforms.”
In keeping with recent publications, notably MPs expenses and those of senior BBC executives, several areas of the report have been redacted, though rather than areas of black ink, Ofcom has preferred to use a scissors icon. The discussion on falling subscriptions to the Sky channels on the Virgin platform is somewhat comedic. However, the report is largely readable, and the direction of the regulator is clear.
The consideration that came out of the second pay-TV consultation has led Ofcom to conclude that it should now consider the case for a market intervention based on its sectoral competition powers that largely falls under section 316 of the Communications Act 2003 (“CA03”). It requires Ofcom to “ensure fair and effective competition” in the provision of licensed services, such as premium channels.
Arguably, the powers could be used against any supplier of content in the UK market, but Ofcom has taken the decision that at this time it is only applicable to Sky.
Discussions with the Premier League are also planned before the next auction for live broadcast rights scheduled for 2012. The Premier League has already made a number of commitments on the auction process, but these will expire before the renewal, and Ofcom is keen to get a new commitment. Arguably with two Premier League packages to its name, it remains possible that ESPN will find itself caught up in the process, though with the new premium sports channel still being developed it is extremely unlikely that anything will happen in the near term.
Ofcom suggests that it might be beneficial simply to rollover the current set of agreements, arguing that it produced benefits such as the entrance of Setanta, even if the consumer was required to pay more for their subscription. (Virgin Media customers benefitted greatest from Setanta’s time as a premium sports broadcaster, the sweetheart deal that allowed big basic subscribers to receive the channel free, while those on Sky needed to find an additional £15 [€17] per month).
The size of the gulf between Sky and Ofcom is indicated by a short passage that describe the relationship between the satcaster and Virgin, the only platform with which it holds a wholesale agreement of any sort, though if you take Ofcom’s separate market data as a guide, only DTT can be considered to be of significant size.
“Sky appears to believe that it is under a de facto requirement to supply Virgin due to previous competition cases. From our review of Sky’s own statements, our view is that its prices to Virgin appear not to be based on a commercial calculation (eg weighing higher prices against greater sales volumes), but rather on Sky’s view as to the highest price it can charge without coming into conflict with the OFT’s 2002 margin squeeze test.” The report goes on to include Virgin’s well-worn argument that it actually loses money on each Sky premium subscription it sells.
Other platforms have sought wholesale agreements, but Sky’s preference is for a retail agreement, not actually uncommon among European platforms where the pay-TV provider as opposed to the platform owns the customer. According to Ofcom, where Sky has gone on to discuss wholesale prices, it has not moved in any meaningful way from the prices contained within the cable ratecard.
According to the regulators ‘vertical arithmetic’ calculations, it is possible for Sky to remain incrementally profitable at a wholesale price 25% lower than the current ratecard.
“Our view is that Sky weighs the immediate commercial benefit of supplying other retailers against the strategic benefit of withholding supply and/or restricting the terms of supply,” says Ofcom, adding that its view has been reached through discussions with third parties and the evidence from their negotiations. The accusation against Sky is straightforward in that it has been able to manage the competition between rival platforms in order to maintain the strength of its own satellite offer.
Sky’s key sports channels Sky Sports 1 and 2, and all the Sky Movies channels apart from Classics would be included under the proposals. The HD channels would also be covered, though there is a nod to the abilities of the satellite platform to offer larger amounts of bandwidth than its terrestrial competitors.
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