Security of supply

100. Cable operators generally, where they have contracts, have short fixed term agreements and the pricing and content of the programming are subject to change at short notice. In our discussions with the industry security of supply has emerged very strongly as a second central issue for the review. There are two aspects to the concern:

• that uncertainty over continuity of supply of an essential input is a significant additional risk for projects involving considerable long term investments with large uncertainties and sunk costs;
• uncertainty over pricing and other terms and conditions means that cable companies are vulnerable to disruption by unexpected changes.
  

101. The first of these issues has direct implications for the telecommunications because, if perceived risk, has added to the cost of capital this may well have implications for the development of competing networks in telecommunications.

102. We know that you have asked the cable companies for financial information which might allow you to draw firmer conclusions on these issues. Again however it may be difficult to isolate the effect of this uncertainty from other risk factors.

103. It is against the background of uncertainty over continuity of supply that the remarks by Rupert Murdoch and David Elstein should be seen. (To paraphrase, Mr Murdoch has argued in relation to the Government's proposals on media ownership that if Sky were in danger of breaching the 15 per cent ceiling for TV audience share it might be forced to withdraw programming from the cable companies, and Mr Elstein has said that if faced with a rival cable TV sports premium channel Sky might withdraw Sky Sports from cable). It may well be that these remarks were off-the-cuff speculation, but they are clearly liable have an effect on the climate of investor confidence and seem likely to be factored in (to some degree) by analysts and prospective investors into their decisions. Such remarks may not have been intended to have a destabilising effect but nevertheless have a clear potential to have such an effect.

104. In our view, security of supply is an issue which has to be addressed in any future undertakings. In contrast to the majority of cable operators, Sky's own retail business enjoys security of supply - and we assume control over decisions on pricing and the launch of new services. There appear to be good grounds for taking the view that the present level of insecurity puts these cable operators at a significant competitive disadvantage relative to the Sky retail DTH business (although it is recognised that a third-party could never enjoy the same degree of security as a fully-integrated company).

105. It seems reasonable to expect that a supplier of programming in a competitive wholesale market would seek longer term distribution contracts - after all many of its investments will have relatively long time horizons and it will wish to build on the strength of successful programming. (Indeed we understand that programme providers other than Sky tend to have contracts for three years or longer). The fact that Sky seems to be operating in a very different way raises questions about the possibility that it may be engaging in strategic behaviour. This is a particular concern in relation to the NYNEX and TeleWest agreements. There seems a very real possibility that given the dependence of the two companies on Sky's programming and the companies' concern over their vulnerability in the absence of long term contracts (which in NYNEX's case was made more pressing with an imminent flotation) Sky has used the prospect of longer-term programming as a negotiating tool to forestall competition in premium programming and secure its position in pay-per-view.

Other contractual terms: advertising

106. The contractual limitation preventing cable operators from carrying their own advertising (or opting out of any of Sky's advertising) denies them a potentially significant source of revenue and in our view is undue discrimination against Sky's downstream competitors and contrasts with what we understand to be general industry practice which is to allow a certain amount of advertising.

107. We also have telecommunications-specific concern which is that Sky has used its advertising to promote offers of (subsidised) discounts on BT calls to its DTH customers. In our view operators should have the ability to opt out of such advertising.

Possible remedies

108. Length of contract: we suggest that the undertaking provide for a minimum contract length or even a rolling contract.

109. Price review and consistency of supply: the undertakings a should make provision to secure a degree of predictability as to the timing and amount of price increases and a degree of predictability and consistency of channel content. This should not inhibit Sky's ability to offer genuinely additional services.

110. Independent arbitration: the suggestions on length of contract and price review etc. will depend on appropriate arrangements for independent arbitration.

111. Advertising: our view would be that Sky should provide ad avails in line with standard industry practice. Arrangements for independent technical assessment could be put in place to deal with any questions as to the technical capability of the cable operator to make the necessary insertions.

Go to next section of this document