Pay TV statement
31 March 2010
1.1 After three rounds of consultation, we have made three decisions:
- To require that Sky Sports 1 and 2 are 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. This conclusion is also conditional on any movies channels included in Picnic being offered to other digital terrestrial TV retailers.
- 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. This is with a view to asking the Competition Commission to remedy those competition concerns which we have identified, particularly in relation to the restricted exploitation of subscription video-on-demand movie rights, but which we cannot adequately address using our sectoral powers.
1.2 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.
1.3 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.
1.4 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, and we believe that it will remain crucially important for the development of new platforms and new services.
1.5 For many years Sky has held the exclusive rights to broadcast first-run Hollywood movies and many of the most sought-after premium sports. We have 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 movies content, and the importance of linear channels is starting to reduce. Looking forward, we expect 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.
1.6 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.
1.7 We have decided that we should use our 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 we cannot expect commercial agreement between Sky and other retailers, we have 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.
- We have set a wholesale price for each of Sky Sports 1 and 2, when sold on a standalone basis, which is 23.4% 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%.
- In calculating these prices, we have 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.
- We have not set a price for high-definition versions of Sky Sports 1 and 2. We have accepted Sky's argument that high-definition services are a relatively recent innovation, and that pricing flexibility will help promote future innovation. We instead require Sky to offer contractual terms for supply of these channels on a fair, reasonable and non-discriminatory basis.
- We have provided guidance on a number of non-price matters such as security, to ensure that the remedy is implemented as quickly as possible.
1.8 We have decided it would not be appropriate to impose a similar obligation on Sky's movies channels. We have concerns over restricted distribution of movies channels, but our main forward looking concern relates to the sale of video-on-demand rights. We cannot adequately address this concern under section 316 (which relates primarily to linear channels). Instead we believe we should make a reference to the Competition Commission under the Enterprise Act 2002, and as required by statute, we are consulting on that proposed decision.
1.9 We have decided to consent 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, whilst also ensuring fair and effective competition.
1.10 We expect these decisions to deliver substantial benefits to consumers.
- The most immediate benefit will be felt on digital terrestrial television. Ten 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.
- We also expect 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.
1.11 In deciding what it is appropriate to do to ensure fair and effective competition, we are 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. That is why we have deliberated carefully on these issues over the course of three consultations. We believe, however, that our remedy is appropriate:
- Although we acknowledge that Sky is opposed to the remedy, we see the reasons for this opposition as being related to its strategic incentives to protect its retail business. We do 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, including in prior discussions with Ofcom. The potential negative impact of the relatively modest price decrease we are implementing should be more than offset by market expansion effects.
- We have 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.
1.12 Similar interventions have succeeded in other countries. In the US in particular, the Program Access Rules have enabled market entry by new satellite and IPTV platforms.
1.13 Our sports channels remedy and our decision on Picnic both come into effect immediately, with a view to both Sky and its competitors being able to launch new services in time for the start of the next football season in August.
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