Ofcom has warned Sky that it will review the wholesaling of its premium sports channels if the broadcaster were to shift content to channels not covered by proposals to open up its premium channels to rival operators.
“If Sky was to do this to any material extent, Ofcom would review the remedy and would consider extending it to include the relevant channels. This would not require a protracted process, since the substantive issues would be the same as those on which Ofcom has concluded in today’s statement,” Ofcom warned.
After three years and three separate consultations, the regulator’s pay-TV review has concluded that Sky must supply Sky Sports 1 and Sky Sports 2 across all platforms. On condition of a wholesale deal being concluded, Ofcom has given approval to the Sky-Arqiva terrestrial pay plan known as Picnic. If Sky chooses to offer movie channels as part of a terrestrial offer then those channels must also be offered to other terrestrial operators.
Ofcom: Three Years, Three Consultations, Three Conclusions
• To require that Sky Sports 1 and 2 are offered to retailers on platforms other than Sky’s, at prices set by Ofcom.
• To approve Sky and Arqiva’s request for Sky to offer its own pay-TV services on digital terrestrial TV (‘Picnic’), but conditional on a wholesale must-offer obligation on Sky Sports 1 and 2 being in place, with evidence that it has been effectively implemented. This conclusion is also conditional on any movies channels included in Picnic being offered to other digital terrestrial TV retailers.
• To consult on a proposed decision to refer two closely related movie markets – for the sale of premium movie rights and premium movie services – to the Competition Commission. This is with a view to asking the Competition Commission to remedy those competition concerns which we have identified, particularly in relation to the restricted exploitation of subscription video-on-demand movie rights, but which we cannot adequately address using our sectoral powers.
Source: Ofcom
BSkyB has said it is looking forward to the judicial process after Ofcom published the long-awaited conclusions of its pay-TV enquiry that began in March 2007 following a joint complaint from BT, Setanta, Top Up TV and Virgin Media.
Under Ofcom’s remedy known as “wholesale must-offer”, the regulator has set a wholesale price of £10.63 (€11.90) per subscriber per month when sold on a standalone basis. This will reduce the price by 23.4% below the current wholesale price to cable operators, short of the 30% that had originally been proposed. Virgin Media has said it loses money when selling Sky premium channels to its subscribers. The bundle of Sky Sports 1 and 2 favoured by the majority of customers has been reduced by 10.5% to £17.14.
However, Ofcom believes that concerns on the sale and distribution of subscription VOD powers fall outside of its remit even though it believes “there is ineffective exploitation of subscription video-on-demand movie rights”, and has launched a fourth consultation on a possible reference to the Competition Commission.
The regulator says its proposed decision to refer the markets is based on
• The upstream sale of movie rights from the Major Hollywood Studios.
• The wholesale supply of packages including Core Premium Movies channels in the first pay-TV subscription window. The purchaser of these rights is currently able to show movies on subscription linear channels as well as via SVOD services.
Ofcom’s explanation is that the markets are characterised by features that taken in the round have an adverse effect on competition in the sector. These are:
• Staggered availability of content rights and duration of contracts for premium movie rights.
• Aggregation of substitutable premium movies into a single wholesale offering
• The joint licensing of premium linear channel and SVOD rights
• Exclusivity of rights licensing agreements between individual studios and purchasers of rights by individual studios
• Other restrictions in contracts for the rights in the first pay-TV subscription window
• Sky’s market power in the distribution of Core Premium Movies channels, which in turn gives Sky a high degree of negotiating power with the Major Hollywood Studios in the upstream market.
• Vertical integration of firms over the pay-TV supply chain. In particular, vertical integration in conjunction with its market power gives Sky an incentive to limit the exploitation of its SVOD rights, and restrict distribution of its wholesale channels.
The Hollywood majors are defined as NBC Universal, Viacom, Fox Filmed Entertainment, The Walt Disney Company, Sony or Time Warner and their subsidiaries.
New Television Insider would observe that the consumer has an increasing choice of sources for premium movie content. On either side of the pay-per-view window it is still possible to go down to the local DVD store and either rent or purchase a movie of choice. In premium Sky, in common with Canal+ and other European providers, what ten years ago would have been a single movie channel has now been divided into multiple genre specific channels. With the same amount of movies available the consumer has multiple opportunities to view – or record on – their PVR.
The arrival of hybrid devices has meant that satellite as well as cable can offer some sort of subscription on demand service. This is typically bundled in with a subscription to the linear channels as a successful churn-busting mechanism. So is the lack of availability a factor of television technology only now embracing IP to widen consumer choice or is an unfair advantage from either the studios or the pay-TV operators coming into play?
It is the SVOD rights that are causing Ofcom the most concern, noting that Sky’s plan for a Pull TV service will be restricted to a “minority” of its set-top box inventory. The minority is the two million homes that currently have one of the Sky+ HD receivers. This is now the standard receiver and New Television Insider would argue that it would be unreasonable to expect Sky to upgrade the remaining eight million at a moments notice, particularly given that for all the industry enthusiasm for VOD, the consumer still prefers to watch linear channels!
But the problem goes deeper, movie studios bundle in their less attractive product with the blockbusters that draw in the crowds. For every Gladiator there is a Curse of the Killer Tomatoes. Linear and VOD rights are packaged together by the studios and, according to Ofcom; this is then compounded by the high prices charged by Sky for its premium movie channels.
Ofcom believes there is a “reasonable prospect” that the Competition Commission would have remedies open to it that would impose restrictions on the way movie rights are bought and sold and could force Sky to provide regulated wholesale access on particular content.
Despite the current restrictions, and perhaps aided by its technology, Virgin Media offers the widest selection of movies. According to Ofcom, in 2008 Sky offered a total of around 400 films (including HD) priced at £3.99 per film on its PPV nVOD service. This compares to Virgin Media, which offered a catalogue of around 500 films on the FilmFlex PPV VOD service. New releases were priced between £2.50 and £3.50 and library titles were priced between 50p and £2.97. The availability of on demand on the cable platform meant Virgin was able to offer a greater selection of movies at any one time.
HD versions of Sky Sports 1 and Sky Sports 2 must also be offered to other providers, but Ofcom has stopped short of setting a wholesale rate, other than to state they should be offered at “fair, reasonable and non-discriminatory terms”.
Sky’s two other premium sports channels, Sky Sports 3 and Sky Sports 4 (the former Sky Sports Xtra), are not included in the wholesale ratecard. Both channels also have HD versions.
“Premium sport, such as Premier League football matches, will be available to around 10 million Freeview-only homes receiving TV through an aerial, and via other TV platforms. Ofcom estimates that, as a result of these decisions, there could be around 1.5 to 2 million additional consumers of premium TV channels by 2015,” the regulator said in a statement.
BSkyB chief executive Jeremy Darroch said he was disappointed with Ofcom’s conclusions. According to Darroch, Sky charged a fair price both to its direct-to-home subscribers and existing wholesale customers. “I think it’s very easy to say it would be nice if everything was cheaper but that is an argument you can apply to pretty much everything from cars to take away coffee,” he said. “It’s not, in my view, the job of regulators to set prices in free markets unless there’s clear evidence of breach of law or consumer harm and that is manifestly not the case here. You know, in no other country in the world do people seek to regulate the price of TV in the way that Ofcom are proposing and I think that tells its own story”. Darroch said that businesses had so far shown little interest in investing in pay-TV sports and would not do so in the future if they could get access to Sky content at a “knock down price”.
For its part Ofcom said that it had made its decision in the best interests of customers. “It is in the interest of consumers for these decisions to come into effect as soon as possible to deliver the benefits of wider choice and innovation. We are happy to defend our decision wherever necessary.” It should be noted that when the European Commission intervened to break up the sports rights distributed by the Premier League, consumers ended up paying more.
Gavin Patterson, CEO, BT Retail, described Ofcom’s decision as disappointing, but a step in the right direction, and said it hoped to offer Sky Sports at lower prices than had previously been available by the start of the 2010/11 season. Such a move would require BT to broadcast linear channels over its IPTV network for the first time. “Ofcom should have gone much further than it did. They have dropped movie channels, which should have been included. They should have included all Sky Sports channels, not just two. The wholesale price for the two sports channels is higher than the regulator had previously suggested.”
Sky is now required to make a “reference offer” as a template to other pay-TV operators within six weeks. This includes minimum security requirements, which itself could set up a new series of arguments.
If Sky were to proceed with the Picnic pay-TV offer then it would no doubt be in DVB-T2/MPEG-4, meaning that if Top Up TV wanted to join in then the rival operator would also have to think about upgrading its receivers. A submission from Sky in June 2009 expressed concern about the security used by Top Up TV and BT Vision, saying that the satcaster believed the version of Nagra used by the two players was unsecure. The Nagra system in question has subsequently been upgraded to the latest ‘Merlin’ iteration.
The new consultation, on the reference of movies to the Competition Commission, will close on May 15, with a final decision expected before the summer of 2010.
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