112. The sections on pricing and security of supply discussed a number of areas where there appears to be a question as to whether Sky might be using (or have the potential to use) its dominant position in one part of the market (wholesale premium programming) to leverage its position in another (retail-distribution). The issues over the terms of supply of Sky channels and third party channels also raise the question of whether Sky may also be able to use its dominant position in certain markets to gain advantage in other related markets.

Terms of supply for Sky channels

113. On the supply of Sky channels the question is the scope for Sky to use its position in the market for premium content to leverage its position in the market for general news and entertainment channels. There seem to be three issues:

i. whether supply of Sky sports and the movie channels is conditional on purchase of Sky News and Sky One;

ii. the significance of the 'buy-through' restriction - premium channels may only be sold to subscribers who also take a basic package;

iii. the obligation to supply Sky One and Sky News, if carried, to every subscriber.

114. Sky say that cable operators do not have to buy Sky One and Sky News in order to obtain the premium channels. However, the versions of the contract we have seen assume that all the channels are purchased. This may be because in practice all the companies choose to buy these channels - however we believe this is an issue that should be specifically addressed in any undertakings.

115. A further reason why we believe that this issue has to be addressed in the undertakings is that the advent of Pay Per View (PPV) and Near Video on Demand (NVOD) may lead to Sky seeking (as it did in the TeleWest and NYNEX agreements)to assure itself of large blocks of channel capacity on operators' systems.

116. The second set of issues concern whether premium channels should be available only to subscribers to basic channels. We cannot make a judgement on the proposition that this method of tiering is demanded by the Hollywood studios or other suppliers of film product - or equally whether Sky could negotiate other conditions if it so wished. We would note however that there should be no similar reason why this approach should apply to Sky sports channels.

117. The traditional approach modelled on American experience (where cable companies have until recently been barred from offering telephony) is that the basic package in effect incorporates a standing charge element (the equivalent of telephone line rental). Offering premium services on their own would not produce any great saving for the consumer as the standing charge element would still need to be recovered. UK cable companies are in a different position because they offer telephony - this makes it viable to offer incremental services on a stand-alone basis. We believe that this underlying issue will become, if anything more important with the advent of pay-per-view.

118. There does not seem to us to be any reason why in principle premium programming should not be available on stand-alone basis. We do not know to what extent cable companies will seek to exploit this ability - or whether they will opt for a range of packages with optional add-ons. The important point however is that they should have the ability to develop their own marketing strategies which best meet the demands of consumers and their own business needs. there appears to us to be a good case for addressing this issue in any undertakings.

119. The third issue is the requirement that Sky News and Sky One can only be carried if they are available to all subscribers. Given that these two channels can account for a quarter or so of the programming costs of a basic package this has clear potential to restrict the scope to offer tailored and low-cost sub-basic options - or to differentiate packages for particular areas. (Limiting the scope for such differentiation may also reduce opportunities for channels suited to such niche packages - eg ethnic minority channels. The obligation would appear to restrict consumer choice and to make consumers pay for channels they do not necessarily want.

120. We freely acknowledge that Sky One (with a 4.9% share of viewing in cable/satellite homes) is the most popular of the basic channels on cable (Sky News with a 1.2% share is one of the more popular channels but others are ahead). However, total viewing shares only measure the popularity of the channel among the audience as a whole - they do not measure the preferences of the particular sections of the audience at whom differentiated packages might be aimed.

121. Clearly programme suppliers and retail distributors (including cable operators) have different interests here. Programme suppliers interests are to maximise their audiences and minimise the level of risk. Retail distributors on the other hand have an interest in maximising their commercial flexibility. In practice this tension is resolved in negotiation with pricing negotiated in relation to a guaranteed number or proportion of subscribers. In principle there is no reason why this matter should not be a matter of commercial negotiation. The problem in Sky's case is the mismatch of bargaining power - derived from Sky's dominant position in the wholesale supply of premium channels. Our view is that Sky should make advertising avails available in line with industry standard practice. The section on possible remedies includes our suggestions on how this might be addressed in any undertakings.

122. Finally, the cross-advertising of other Sky channels (without the right of cable operators to opt out) may make it difficult in practice for cable operators not to take certain Sky channels and in our view undermines the objective of the undertaking to remove channel bundling.

Terms of supply for third party channels

123. Another set of issues stem from our concern about the potential for Sky to build upon its dominant position as a wholesaler of its own channels to become a wholesaler of third-party channels. The question here concerns the scope Sky may have derived from its dominant position in retail-distribution (which means that to get access to the major part of the UK pay-TV subscriber base you have to go through them) in order to secure the right to supply third party programming in the wholesale market or to control the terms on which it is made available. This possible effects are: reinforcing the dependence of the cable companies on programming available from Sky; foreclosing the possibility of competition in the wholesale programming market; or hypothetically, making it possible for Sky to deny, if it chose, programme material to rivals to its DTH business (eg cable or digital terrestrial television).

124. This is the long term concern that is raised, in particular in relation to the Disney Channel. No doubt the review will wish to address the issue of whether the Disney Channel is being made independently available to cable companies other than as a channel bundled with the Sky premium channels. There seems to us good reason to doubt whether this requirement can be effective without a requirement for Sky to unbundle at the wholesale level in line with the provision in the undertakings prohibiting the bundling of dissimilar channels (which we believe to be in the interests of the consumer and strongly support).

Conclusion: channel packaging issues

125. The analysis of the channel packaging issues highlights the need to consider appropriate safeguards to prevent Sky using a dominant position in one part of the pay-TV market to distort competition in another. In our view the issue at the heart of the discussion of the terms of supply of Sky's own channels is the need to consider what safeguards are necessary to deal with the potential for market power in the wholesale market for premium channels to lead to distortion in the more competitive wholesale market for general news and entertainment channels. Similarly, in relation to the wholesale supply of third party channels consideration needs to be given to safeguards to prevent Sky using a dominant position in retail distribution to extend its dominant position in the wholesale market for premium channels by becoming an exclusive wholesale distributor for third-party channels in return for access to its subscriber base.

126. There is also the potential for it to use its dominant position to leverage its position either in future new markets (eg online gambling) or in new services within the pay-TV market (Near Video on Demand and digital terrestrial television).

127. The agreements between Sky and NYNEX and TeleWest are very relevant here in illustrating that the potential for abuse of dominant position is not hypothetical. These agreements appear to demonstrate that Sky has both the capability and the willingness to use its market power in one part of the market to forestall competition in another - in this case by using its dominant position as a supplier in the wholesale market to forestall competition in the retail market from alternative sports and movie channels. We understand that they are the subject of a separate investigation under the Restrictive Trade Practices Act, but in our view they should be taken into account in considering whether additional safeguards are needed.

Possible remedies

128. Bundling: the contract should explicitly provide for separate purchase of individual channels or for certain channels not to be carried.

129. Advertising: we would suggest that the undertakings require Sky not to cross-promote channels if the cable operator does not have the ability to opt out from them. These opt-outs could provide the ad avails suggested above. the same provision should apply to offers restricted to Sky DTH subscribers.

130. Obligation to provide Sky One and Sky News to all basic subscribers: it may be that this issue can be simply addressed by unbundling ie specifically providing for the cable operators to be able not to take specific channels if they do not wish to do so (this assumes that the real strength of Sky's bargaining position lies in its premium programming). There may well however be a need for the undertakings to make provision for independent arbitration where this cannot be resolved (this might for example settle that the proportion of guaranteed subscribers be in line with standard industry practice).

131. Wholesale distribution of third party channels: we support the OFT's effort to require that Disney should not be supplied in the wholesale market exclusively through Sky. There must however be a question mark over the effectiveness of this without a requirement on Sky to unbundle.

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