Network access

49. The preceding section has highlighted the fundamental importance of Sky's distribution system. Sky controls the dominant distribution network for pay TV. Access to that network is essential to reach the majority of the UK Pay TV subscriber base. Control of that distribution system underpins Sky's ability to acquire premium programming and to maintain a dominant position in the wholesale market for the supply of premium channels. There is a clear potential for dominance in distribution to impact on competition elsewhere in the market. The question to be considered is what safeguards might be necessary to prevent this.

50. Oftel's experience in telecoms suggests that the control of bottleneck gateways by dominant operators is a key issue to be addressed if there is to be fair competition. We would be happy to assist if the OFT wishes to draw on our experience in this area.

51. Oftel has not received evidence about the operation of VideoCrypt and Sky's subscription management service. We are not able therefore to offer evidence as to whether this may have operated in a way that has or is having the effect of restricting, distorting or preventing competition. There is clearly the potential for this however, and this issue may well need to be addressed in the undertakings.
52. We believe that there broadcasters should continue to have the possibility of independent subscriber management services. Although it is the subject of a separate RTPA investigation we would not support approval of any licensing agreement between News Datacom and Sky which required the use of the Livingston subscriber management service as a condition of the use of the VideoCrypt encryption system.
53. Nor are we able to take a view on the relationship between Sky and SES (Astra) and whether or not Sky might have an influence on the allocation of satellite transponders. Should the OFT review receive evidence of anti-competitive behaviour (such as the exclusion of competitors or conditions requiring the use of a given encryption system) it might be appropriate to consider the scope for action under the Telecommunications Act.

The regulation of conditional access and subscriber management services for digital television

54. The Government has recently published proposals for the regulation of conditional access and subscriber management services for digital television. It proposes to give Oftel the responsibility for regulation of these services through the enforcement of Telecommunications Act licences.

55. The principal licence conditions will require that the conditional access or subscription management service provider makes services available on fair and reasonable terms and does not exercise undue preference or undue discrimination in its charges and other terms and conditions. There will also be a licence condition to prevent dominant operators requiring the purchase of other services as a condition of use of the encryption system. We see this as being of particular relevance to the provision of subscriber management services - which have the potential to form significant 'bottleneck' barriers to entry. The intention is that dominant operators should not be able to require the purchase of its subscriber management services as a condition of use of its encryption system.

56. The intention of these conditions is to prevent dominant operators from abusing their power as gatekeepers. Such abuse might take the form of excessive pricing or unreasonable contractual conditions. It might also involve the operator of the conditional access or subscriber management system using its control over the gateway to unduly favour its own business or discriminate against its competitors in other parts of the market - for example by refusing access or charging discriminatory prices, or making access to the system conditional on using transmission facilities, or becoming part of a 'bouquet' of channels.

57. As we say in the Annex to this paper it is possible that there will be competing encryption systems for digital TV services, the proposals however have been designed to put in place adequate safeguards should a single dominant system emerge. An important part of this is to retain the possibility of competition in subscriber management services.

Possible remedies

58. Conditional access and subscriber management for analogue services: We believe that consideration might also be given to making provision in the undertakings for requirements on the provision of encryption and subscriber management services to third parties. Although it is the subject of a separate RTPA investigation we would not support approval of any licensing agreement between News Datacom and Sky which required the use of the Livingston subscriber management service as a condition of the use of the VideoCrypt encryption system.

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