Select Committee on Culture, Media and Sport Minutes of Evidence


Supplementary memorandum submitted by BSkyB

ITV AND CONDITIONAL ACCESS SERVICES

  At the Culture, Media and Sport Committee hearing on 8 February 2001, representatives of ITV were asked about the need for, and cost of, conditional access services on the digital satellite platform. It may be helpful if we correct the misimpression that could result from ITV's answers.

1.  ITV'S NEED FOR CONDITIONAL ACCESS SERVICES

  1.1  ITV sought to draw a distinction between its free access to the cable and DTT platforms in comparison with the satellite platform. In particular, Ms Stross stated:

    "We are particularly concerned that in its current form the White Paper significantly increases the risk that Sky will be able to use its position as a gateway to extract very high returns from the public service broadcasters. ...We get access to the cable platform free and we have access to DTT because we have been gifted that capacity."

  1.2  Sky does not, in practice, charge for access to its platform as such. Sky does, however, offer a number of services including listings in its EPG and conditional access (encryption) services. Broadcasters that do not wish to avail themselves of these services (such as CNN which is unencrypted) do not, of course, have to pay for them.

  1.3  The representatives of ITV confirmed that ITV will need to be encrypted if it is broadcast on the digital satellite platform. Ms Stross stated:

    "If ITV went onto the Sky platform it would require something called automatic entitlement which, put simply, means that our services would be received only within the United Kingdom and Northern Ireland. The system is designed to stop overspill of the picture signal into France, the Netherlands and so on where we do not have rights." (Emphasis added)

  1.4  This situation should be contrasted with the cable and DTT platforms, on which ITV does not need to be encrypted because the signals are not, by and large, capable of reception in other jurisdictions. Accordingly, ITV will be charged for conditional access services where it needs to make use of them (on the digital satellite platform) and will not be charged for those services where it does not need to make use of them (on the cable and DTT platforms).

2.  CONDITIONAL ACCESS ON FAIR, REASONABLE AND NON-DISCRIMINATORY TERMS

  2.1  ITV has sought to allege that Sky is unconstrained in its charging for conditional access services. Ms Stross stated:

    "In the particular case of satellite, the suggestion in the White Paper appears to be to place a must-offer obligation onto public service broadcasters without imposing any reciprocal obligation on Sky to deal with us on fair and reasonable terms. There is a further problem in that the Oftel guidelines as they are currently set out specifically prohibit Sky from discriminating in favour of public service broadcasters by reason of their status as public service broadcasters. We should like to see those guidelines changed so that if there is a must-offer obligation placed on public service broadcasters there is a reciprical obligation to offer fair and reasonable terms to us."

  2.2  This answer discloses a lack of understanding of the existing regulation of conditional access services. BSkyB's subsidiary, Sky Subscribers Services Limited, offers such services pursuant to the Conditional Access Class Licence that was granted by the Secretary of State under Section 7 of the Telecommunications Act 1984 on 7 January 1997. Condition 1(1) of that Licence states that:

    "Where a Third Party requires any Technical Service in respect of decoders administered by the Licensee, the Licensee shall offer that service to that person on a fair, reasonable and non-discriminatory basis." (Emphasis added)

  2.3  Accordingly, contrary to ITV's evidence, Sky is already under an obligation to offer conditional access services to ITV on a fair, reasonable and non-discriminatory basis.

  2.4  In practice, Oftel interprets that provision as requiring Sky to set its charges in such a way that it should recover its costs for establishing the digital satellite platform and providing conditional access services plus any reasonable rate of return. Sky is not, therefore, capable of extracting "very high returns from the public service broadcasters" as ITV also erroneously claimed.

3.  LOW CHARGES FOR ITV

  3.1  ITV sought to argue that the charges it will be required to pay for conditional access services should be lower than those for other broadcasters. In support of this argument, Mr Walmsley stated:

    "If I may make a brief supplementary point, the purpose of conditional access is primarily to provide the mechanism by which a television subscription business can be operated; ie a person can get access as a consumer to the signal only if he is prepared to pay for it. That is its fundamental purpose."

  3.2  In practice, this statement is not correct. The purpose of conditional access services is to limit access to a channel only to those viewers who are duly authorised. Those viewers may be authorised because they have paid (in the case of a subscription channel) or because they are within the territory for which the broadcaster owns the rights (in the case of any channel, whether it be free-to-air or subscription). ITV has, itself, acknowledged that it needs conditional access services on the digital satellite platform. Indeed, Mr Walmsley went on to state:

    ". . . ITV and other free-to-air broadcasters' requirements for conditional access services are . . . to ensure that the signal is delivered only within the territory of the UK. Many of the rights for the services they broadcast can be used only in the UK and there is no right to deliver a signal into northern France, Belgium and so on."

  3.3  In the circumstances, it is clear that ITV's need for conditional access services is every bit as great as BSkyB's need. Nevertheless, Mr Walmsley sought to develop this erroneous line of reasoning further when he stated:

    "Therefore, the requirement for conditional access is quite a limited free-to-air obligation and on those grounds alone, it seems to us that there is a public service case for the access charges being significantly lower."

  3.4  As has been stated above, only those broadcasters that require conditional access services on the digital satellite platform are charged for them by Sky. The fact that a particular broadcaster wishes to encrypt a channel but then make it available free cannot logically justify a lower conditional access charge.

  3.5  Although such a lower conditional access charge cannot be justified for the reasons put forward by Mr Walmsley, Mr Walmsley should note that Sky's published charges are as follows:

Category of Broadcaster
Charge per Residential Customer
Subscription (Pay TV)
£1.50 to £2.50 per month
Automatically Entitled (eg ITV)
£0.30 per month


  3.6  It is clear, therefore, that Mr Walmsley's request for conditional access charges for ITV to be "significantly lower" than those for subscription broadcasters such as BSkyB has already been satisfied.

4.  INCREASE IN CONDITIONAL ACCESS CHARGES

  4.1  ITV sought to argue that the most recent rise in Sky's conditional access charges was not justified, although it put forward no evidence to support this allegation. In particular, Ms Stross stated:

    "Surprisingly, the ratecard rose from 20p to 30p last October when nothing had happened which, in our view, would have led to the need to raise the figure in that way."

    "If one looks at the recent price rise for automatic entitlement from 20p to 30p per subscribing home, that occurred at a point when the number of subscribing homes was increasing. Therefore, had the figure stayed at 20p Sky's returns would have increased from providing conditional access services, because it would be receiving more 20ps. We have not seen any evidence of changes in Sky's cost base that make a 50 per cent rise in the charges appropriate."

  4.2  These statements disclose a number of errors. ITV assumes that conditional access charges should come down as the platform grows because Sky "would be receiving more 20ps". As the platform grows, the total cost base that needs to be recovered also grows. Platform costs vary with the number of subscribers and are not fixed as ITV seems to assume.

  4.3  Furthermore, before the launch of the digital satellite platform, Sky was encouraged by Oftel to enter into risk sharing arrangements with broadcasters in its agreements for conditional access services. Accordingly, the regulator supported the proposition that Sky could initially set its conditional access charges at a lower rate in order to encourage channels, such as BBC1, BBC2, ITV, Channel 4 and Channel 5 onto the platform. The launch period was clearly the time at which the risks associated with digital satellite broadcasting were at their highest. By participating in that launch, the BBC, Channel 4 and Channel 5 helped to reduce Sky's risks associated with the launch, and in return, received a lower conditional access charge. As the risks associated with digital satellite broadcasting have diminished (if not been eliminated), corresponding risk sharing arrangements are no longer available.

  4.4  ITV was initially offered terms that were comparable to those offered to the BBC, Channel 4 and Channel 5, but chose instead to try to undermine the launch of digital satellite by staying off the platform. Sky expended very considerable effort in trying to pursuade ITV to join the platform at an early stage. At the time of the launch of the digital satellite platform, ITV was notified by Sky that if it did not choose to take up conditional access services at that time, it might find that the charges increased over time. ITV has chosen to wait until the success of the digital satellite platform is assured before it has inquired about receiving conditional access services. As predicted, the charge for those services has increased as a reflection of the fact that by coming on the platform at this comparatively late stage, ITV will not be sharing Sky's risk.

  4.5  In addition, since the launch of the digital satellite platform, the costs associated with it have increased substantially following the move to free set-top boxes. The previous conditional access charge of 20p per residential customer per month was substantially below the level that is justified by BSkyB's costs. Accordingly, that charge has increased and may yet increase further.

  4.6  Overall, the current charge of 30p per customer per month is entirely consistent with Sky's obligation to offer conditional access services to ITV on a fair, reasonable and non-discriminatory basis.

  4.7  Finally, it should be noted that ITV will gain a significant financial benefit from broadcasting on the digital satellite platform. This benefit will arise as a result of:

    —  the "digital dividend", which is the reduction in the tender payments ITV must make for analogue spectrum in respect of households that can receive ITV digitally; and

    —  increased advertising revenue.

  4.8  The financial benefits to ITV of broadcasting on digital satellite exceed the costs of so doing. ITV has only been withheld from digital satellite for the misplaced strategic objective of seeking to drive viewers to ONdigital. ITV has not been deterred from digital satellite broadcasting by Sky's conditional access charges.

February 2001


 
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Prepared 23 February 2001