Ofcom proposes measures to improve competition in pay TV

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Ofcom published today a further consultation as part of its pay TV market investigation.

The consultation sets out details of a proposed 'wholesale must-offer' obligation. This is designed to address our concerns about the restricted distribution of premium sports and movies channels operated by BSkyB.

In addition, the consultation notes that there may be a case for specific targeted interventions in relation to subscription video on demand movie rights and to the next FA Premier League auction of live broadcast rights.

Ofcom's proposals aim to ensure consumers benefit in the short term from an increased choice of supplier and of platform, and in the longer term from enhanced innovation and investment, especially on non-Sky platforms.

Our concern: limited distribution of football and movies

Some programming, such as live top-flight sport and first-run Hollywood movies, is of particular importance to consumers.

Limited distribution of channels

Ofcom considers that Sky has market power in the wholesale supply of channels containing this attractive content, and that it is acting on an incentive to limit the distribution of these channels to rival TV platforms.

As a result, Ofcom believes consumers face a restricted choice of channels and platforms in the short term. In the longer term, new platforms based on innovative distribution technologies may be prevented from developing without access to this content.

Higher returns

A new Ofcom-commissioned study suggests that Sky is earning aggregate returns in excess of its cost of capital, and is likely to continue to do so. These returns appear to be higher in Sky's wholesale business than its retail business, and higher in the wholesale of movie channels than sports channels. Our concern is that they are likely to be reflected in high prices paid by consumers.

The proposed remedy to limited distribution

Ofcom believes that requiring Sky to make its premium channels available to other retailers on a wholesale basis is the most appropriate way of ensuring fair and effective competition. It is therefore also consulting on proposals to put in place a wholesale must-offer obligation, containing a range of regulated prices.

Ofcom believes that this remedy will enable other TV broadcasters to access and offer these premium channels, thereby promoting choice and innovation. 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.

We believe that Sky's wholesale revenues would increase under the proposed remedy, due to its channels becoming more widely available.

Remaining concerns in football and movies

Ofcom is also considering whether there is a case for targeted interventions on subscription video-on-demand (SVoD) movie rights and the next FA Premier League auction.

Films on demand

SVoD allows customers to pay a subscription to watch movies on demand, on platforms which support this capability. Sky currently holds the SVoD rights for all the major film studios, but does not exploit them on its satellite platform.

Separating the sale of subscription video on demand movie rights from standard subscription rights could allow innovative new services to be provided, especially on internet TV and cable platforms.

Ofcom is considering a market reference to the Competition Commission on this subject. However, we propose first to explore the commercial intentions of the Hollywood studios, and whether these would reduce the need for regulatory intervention.

Next football rights auction

The existing European Commission FA Premier League commitments expire before the next auction of live broadcast rights due in 2012.

We therefore intend to review with the Premier League how it intends to ensure that this auction complies with competition law. That will involve exploring with the Premier League whether it is willing to provide further commitments. We expect that review to cover the supply of Premier League football to commercial as well as residential customers.

Sky's proposal for pay TV channels on digital terrestrial TV

The competition concerns and proposed remedies in Ofcom's pay TV market investigation are of direct relevance to its assessment of the proposal from Sky and Arqiva for a new pay TV service on digital terrestrial TV, called "Picnic".

Ofcom therefore intends to publish a statement on the Sky/Arqiva proposal on conclusion of its market investigation.

Ofcom is aware that Sky's plans for Picnic are currently no longer under active consideration.

Ofcom proposes measures to improve competition in pay TV | Ofcom
Pay TV phase three document | Ofcom

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Sky reacted angrily to Ofcom's statement, which follows proposals first set out in September.

"We disagree fundamentally with Ofcom's approach, analysis and conclusions," a Sky spokesperson said.

"In light of Ofcom's determination to pursue its preferred outcome, we will use all available legal avenues to challenge this unwarranted intervention."

Ofcom could force Sky to make premium channels more widely available | Media | guardian.co.uk

Virgin Media CEO Neil Berkett said the pay-TV market did not currently work in the interests of customers.

"Ofcom's statement appears to be an exhaustive analysis of the problem and we're pleased the issue is getting the careful scrutiny it deserves," he added. "We will continue working with Ofcom to bring its investigation to the quickest possible conclusion."

Gavin Patterson, CEO of BT Retail, said Ofcom now needed to "step up the pace" and to enforce the proposals "rigorously."

"It is clear from the demise of Setanta that the market is structurally flawed yet two and a half years have passed since this process began," he added. "Prices have been too high for too long but this could all change if Ofcom breaks Sky's stranglehold by creating a level playing field."

A spokeswoman for broadband and IPTV provider Tiscali said the results would stimulate competition.

?While we do offer our customers premium Sky Sports and Movies services, it is important for us to have access to these services at the same price as cable," she said. "We also welcome any recommendations that might reduce the wholesale cost, as both of these measures together would stimulate more competition and offer better value for the consumer.?

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Sky's chief executive Jeremy Darroch has responded saying:

"Sky invests and takes risks to create television channels of the highest quality. We spend over ?1 billion a year so viewers can enjoy the movies and sports coverage they expect. In doing so, we have increased choice for consumers, raised standards across the industry and provided much-needed support for UK sport.

"We want our premium channels to be widely available on other platforms. But we deserve a fair return on the investments which create so much value for other distributors and their customers.

"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.

"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.

"Ofcom is proposing an unprecedented level of interference in commercial markets. Good regulation does not involve micro-management. Nor does it mean tinkering to re-shape an industry so that it matches a preconceived ideal or a spreadsheet in a regulator's office.

"We reject Ofcom's assumption that it knows better than us how to create value for our business.

"This country needs more companies which innovate for consumers and invest for the long term. Consumers will not benefit if regulators are allowed to intervene to limit the legitimate rewards and opportunities available to successful companies.

"Punishing success has a chilling effect on incentives for investment and undermines the attractiveness of the UK as a place to do business."

Sky will fight Ofcom over premium TV | News | TechRadar UK