(3 April 2010 3:25 pm)

MUMBAI: UK media watchdog Ofcom has announced that after three rounds of consultation, it has made three decisions: Sky Sports 1 and 2 to be 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; and 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.

Ofcom notes that the pay TV sector has delivered substantial benefits to consumers since its emergence in the early 1990s. More than 12 million consumers now pay to access a greater choice of content, at higher quality, and with a greater degree of control than has historically been available from free-to-air broadcasters. Sky has been at the forefront of this development and has delivered substantial benefits to millions of consumers in the UK.

Pay TV services have to date been delivered primarily via satellite and cable networks. However, this investigation comes at a time of disruptive change in the way content is distributed. For example, digital terrestrial TV offers the scope for pay TV to be delivered via aerials, and new broadband networks could offer consumers an unprecedented choice of content, and the ability to access that content on demand.

The ability to provide such services depends not just on technology, but on access to content that consumers want to watch. Live high-quality sports and recent Hollywood movies retain an enduring appeal for many consumers. Access to this content has driven the historical development of pay TV. This will remain crucially important for the development of new platforms and new services.

For many years Sky has held the exclusive rights to broadcast first-run Hollywood movies and many of the most sought-after premium sports. Ofcom has now concluded that Sky has market power in the wholesale of certain channels including this content. However, the position differs between sport and movies:
Sky's position in sport arises from the unique ability of broadcast TV to reach a large live audience, and Sky's control of the live broadcast rights for many of the most important sports. This is unlikely to change in the next few years.

The position in movies is more complex, since there are a variety of ways consumers can purchase movie content, and the importance of linear channels is starting to reduce. Looking forward, Ofcom expects video-on-demand to become increasingly important. However, Sky controls not only all the major linear channel movie rights, but also all of the rights that would be required to develop a subscription video-on-demand service for first-run Hollywood movies.

Ofcom notes that Sky exploits its market power by limiting the wholesale distribution of its premium channels, with the effect of restricting competition from retailers on other platforms. This is prejudicial to fair and effective competition, reducing consumer choice and holding back innovation by companies other than Sky. In the case of movies, the fact that Sky also owns but barely uses the subscription video-on-demand rights denies competitors the opportunity to develop innovative services.

Ofocm has decided to use its powers under section 316 of the Communications Act to ensure fair and effective competition by requiring Sky to offer the most important sports channels - Sky Sports 1 and Sky Sports 2 - to retailers on other platforms:
Given that it cannot expect commercial agreement between Sky and other retailers, Ofcom has set a price for standard-definition versions of these channels at a level that should allow an efficient competitor to match Sky's retail prices. The calculations are based on Sky's own retail costs, adjusted for scale so as to allow for a market with several competitors rather than a single provider.

Ofcom has set a wholesale price for each of Sky Sports 1 and 2, when sold on a standalone basis, which is 23.4 per cent below the current wholesale price to cable operators. Most consumers currently buy packages which include both channels, and the wholesale price for the service bundle which applies in those circumstances has been reduced by 10.5 per cent.

In calculating these prices, Ofcom has taken into account the additional retail revenue generated by Sky from its Multiroom service enhancement, and have also taken into account any associated costs. Other retailers will be free to develop their own service enhancements, including offering Multiroom-type services, by using the same underlying wholesale product at no additional cost.

Ofcom adds that it has not set a price for high-definition versions of Sky Sports 1 and 2. It has accepted Sky's argument that high-definition services are a relatively recent innovation, and that pricing flexibility will help promote future innovation. Ofcom just requires Sky to offer contractual terms for supply of these channels on a fair, reasonable and non-discriminatory basis.

Ofcom says that it has provided guidance on a number of non-price matters such as security, to ensure that the remedy is implemented as quickly as possible.

Further Ofcom has decided it would not be appropriate to impose a similar obligation on Sky's movies channels. Ofcom has expressed concerns over restricted distribution of movies channels, but the main forward looking concern relates to the sale of video-on-demand rights. It says that it cannot adequately address this concern under section 316 (which relates primarily to linear channels). Instead it belieevs in making a reference to the Competition Commission under the Enterprise Act 2002, and as required by statute.

Ofcom has consented to Picnic, subject to a wholesale must-offer obligation on Sky Sports 1 and 2 being in place, and evidence that it has been effectively implemented. This conclusion is also subject to any movies channels included in Picnic being offered to other DTT retailers. These conditions will allow consumers to benefit from access to Picnic, while also ensuring fair and effective competition.

Ofcom expects these decisions to deliver substantial benefits to consumers. The most immediate benefit will be felt on digital terrestrial television. 10 million Freeview households will, if they so choose, be able to access the most attractive sports content via their existing aerials, and competition between Sky and other retailers should ensure a wide range of packages, including lower-priced entry-level bundles.

Improved access to 'must-have' content will incentivise investment in new means of distributing content, such as faster broadband networks. In the longer term, this will result in a range of innovative new services for consumers.

Ofcom also expects to see improved choice of wider bundles which include broadband, voice and TV services, with a variety of suppliers able to compete effectively across all three of these key communications markets. In deciding what it is appropriate to do to ensure fair and effective competition, Ofcom says that it is particularly mindful of the benefits that Sky has historically delivered to consumers, both through investment and innovation on its own platform, and its willingness to make long-term investments in UK sport.

Although Ofcom acknowledges that Sky is opposed to the remedy, it sees the reasons for this opposition as being related to its strategic incentives to protect its retail business. It does not expect the remedy to reduce Sky's wholesale revenues. Sky already wholesales Sky Sports 1 and Sky Sports 2 to cable operators, and has expressed a willingness to extend wholesale supply to other platforms. The potential negative impact of the relatively modest price decrease being implemented should be more than offset by market expansion effects.

Ofcom further says that it has designed the remedy to minimise the potential risk of any negative impact on the value of sports rights. The wholesale revenue available to Sky to pay for sports rights should not be reduced, and should in fact increase as the market expands. The other broadcasters whose bidding behaviour has driven rights values in the past should not be materially affected. And in the longer term the emergence of new retailers, with significant numbers of subscribers, should increase competition for rights, given the various benefits associated with direct control of those rights. Ofcom notes that similar interventions have succeeded in other countries. In the US in particular, the Programme Access Rules have enabled market entry by new satellite and IPTV platforms.