Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by British Sky Broadcasting (BSkyB)


    —  Digital television has been a British success. Over 35 per cent of UK homes have now gone digital—that is more than anywhere else in Europe.

    —  Sky recommends that Government conduct a cost-benefit analysis of proposals that may need to be adopted to achieve analogue switch-off, to ensure that the benefits outweigh the costs.

    —  Sky supports the Government's policy of platform neutrality. It does not believe that policies should favour certain broadcasters, operators or platforms over others.

    —  Digital satellite is the only open platform in the UK. Any broadcaster can obtain satellite capacity and retail its own channels.

    —  Access to Sky's EPG and conditional access services is regulated, and Sky "must offer" these services to all-comers on a fair, reasonable and non-discriminatory basis.

    —  Despite the "digital dividend" from broadcasting on satellite, ITV withheld ITV1 from the Sky platform for three years in order to boost the take-up of ONdigital (now ITV Digital), the pay-TV operator owned jointly by Carlton and Granada.

    —  ITV Sport is currently not available to satellite viewers for the same reason (ie ITV is withholding the channel). Sky has no ability to prevent the broadcasting of any channel on digital satellite.

    —  Sky agrees with the Government's Digital Viewers' Panel, which concluded that it would be "unwise to require that only digital televisions can be sold in future (this) might restrict innovation and could well limit viewers' access to new features developed within the lifetime of their set" (December 2001).

    —  The BBC claims that driving digital take-up is a key objective for BBC3, its proposed service for 25-34 year olds. Yet over 60 per cent of 25-34s are already cable, satellite or digital terrestrial television viewers—and of the remaining analogue terrestrial only 25-34 year old viewers, over 40 per cent already intend to purchase digital.


  1.  Thirteen years ago Sky pioneered direct to home (DTH) satellite broadcasting in the UK. At enormous risk and expense the company initially launched four new channels including Europe's first indigenous 24-hour news channel, Sky News. At a stroke, Sky doubled the number of channels available to British viewers, introduced competition into the television market-place, and created a new broadcasting platform open to others.

  2.  Other broadcasters soon followed Sky's lead by leasing transponders and riding on the back of the distribution base, the audience and the marketing investment created by Sky. By the mid-1990s more than 40 channels were available to UK viewers on the analogue satellite platform, of which Sky-owned channels comprised a minority.

  3.  In 1998 Sky became the first broadcaster to launch a digital service in the UK. Three years later, it became the first (and remains the only) platform to have switched off its analogue signal.

  4.  To date the company has invested more than £2 billion in digital television. Approximately 5.5 million satellite homes now have Sky Digital—with seven million expected by the end of next year. Digital satellite viewers can choose from more than 200 channels from many different broadcasters, including BBC, ITV, Channel 4, Discovery Networks Europe, National Geographic, History Channel and Arts world. Viewers can receive more free-to-air (non-subscription) channels—and radio services—through digital satellite than through digital terrestrial television.

  5.  Digital satellite is an open platform, in contrast to digital terrestrial and cable. Broadcasters can obtain capacity from the satellite operator, SES, and retail their own channels.

  6.  Access to Sky's electronic programme guide (EPG) and conditional access (encryption) services are regulated by OFTEL; Sky is under an obligation to offer these services to all-comers on a fair, reasonable and non-discriminatory basis.

  7.  Sky has pioneered the development of interactive television in the UK. Viewers can send e-mails, shop on screen, play games, place bets, bookmark favourite channels and manage their finances. Sky Sports Active enables viewers to change camera angles, access match statistics and watch the highlights. Sky News Active gives viewers a choice of news feeds and summaries. Sky's Wireless Markup Language (WML) browser means it now has one of the world's biggest networks of internet-related devices.

  8.  In late 2001 the company launched the UK's first fully integrated personal television recorder, Sky+. It allows viewers to watch one digital satellite programme while recording another; automatically record episodes from their favourite series without videotape; and pause live television.


  9.  Sky commented on three key issues in its memorandum to the Committee's previous inquiry on the Communications White Paper last year: the regulatory structure; public service broadcasting; and ownership. Sky's views on those issues remain valid.

  10.  A number of developments and issues have arisen since that time which may be of interest to the Committee including: the launch of some ITV services on digital satellite; BBC and ITV's campaign for a "must carry" rule on satellite; publication of the Government's Digital Television Action Plan; the OFT investigation of Sky; and the BBC's new application for BBC 3.


  11.  In November 2001, ITV1 launched on digital satellite with 16 regional services, comprising each of the 14 ITV regions and separate services for Border England and Border Scotland and for HTV Wales and HTV West.

  12.  This reversed ITV's longstanding strategy of withholding ITV1 from the digital satellite (DSat) platform in order to boost the take up of ONdigital (now ITV Digital), the pay-TV operator owned jointly by Carlton and Granada. As a senior ITV executive explained to The Guardian in 1998: "We all need to limit the increase in digital satellite television, not encourage it" (28 March 1998).

  13.  Stuart Prebble, ITV Chief Executive, described the arrival of ITV1 on DSat as "good news for satellite viewers", who would now be able to watch the main ITV service in each region on the digital electronic programme guide (EPG) on channel 103, and "good for ITV, which benefits from the `digital dividend' which, we receive for encouraging digital viewing."

  14.  Granada announced that it "would immediately earn a net £22 million per annum from increased digital dividend" as a result of its distribution to 5.5 million DSat homes. It made clear that this would be an "annual saving", after accounting for the costs of satellite transponders, uplink and conditional access services.

  15.  ITV2 also launched on DSat in late 2001, instantly increasing the channel's distribution by over 150 per cent. Stuart Prebble stated that "this dramatic increase in distribution will allow (ITV2) to realise its potential. In this competitive multi-channel world this deal will increase both the distribution and visibility of our channels".


  16.  Sky has recently received a number of queries from MPs about the non-availability of the ITV Sport channel—which broadcasts the Nationwide League and Worthington Cup—on DSat.

  17.  ITV has deliberately withheld the ITV Sport channel from satellite viewers whilst adopting a policy of blaming its lack of availability on Sky.

    —  Last year, Gerry Murphy, Chief Executive of Carlton, told Mediaweek (25 June 2001) that ITV Digital would have more sport than any other platform because of its exclusive distribution of the ITV Sport channel.

    —  Rob Fyfe, Chief Operating Officer of ITV Digital, told the Daily Mail that he had "been fighting long and hard" to keep ITV Sport exclusive to ITV Digital (26 July 2001).

  18.  If ITV does eventually decide that it wants to make ITV Sport available via digital satellite, it can adopt one of two approaches.

  19.  It could supply the channel to Sky for inclusion in its retail packages. Sky has offered ITV terms for such a distribution deal but ITV has declined to negotiate. Or, it could retail the channel itself by taking conditional access services from Sky.

  20.  Satellite is an open platform. Sky is obliged to offer conditional access services to all-comers on fair, reasonable and non-discriminatory terms, regulated by Oftel. To date, ITV has not taken up either option. Sky has not, and is not in a position to, deny access to ITV Sport. Sky hopes that ITV will soon make the ITV Sport channel available to digital satellite viewers by one of these means.


  21.  In its evidence to the Committee's previous inquiry, ITV called for the extension of "must carry" requirements to conditional access services on satellite. It argued that this was a necessary quid pro quo for the Government's desire to see carriage of the core public service channels on every digital platform. Sky subsequently submitted a supplementary memorandum to the Committee in order to correct the misimpression that could have resulted from ITV's evidence.

  22.  It must be recognised that there is not, as yet, a "must offer" requirement on public service broadcasters. Indeed, it was ITV's longstanding refusal to make the nation's then most watched channel available to satellite viewers—despite the availability and platform-neutral stance of every other UK public service broadcaster—that culminated in the "must offer" proposals being included in the White Paper.

  23.  ITV and the BBC have also campaigned jointly in Brussels and Strasbourg for the extension of "must carry" via European legislation. They argue that their obligation to make services universally available—particularly if they are under a "must offer" requirement—is not matched by an equivalent obligation on conditional access providers, thus weakening their negotiating position.

  24.  This is incorrect. Sky has effectively been under a "must offer" requirement since the inception of the DSat platform. It has always been obliged by law to offer its conditional access services to all-comers (whether a public service broadcaster or any other channel) on a fair, reasonable and non-discriminatory basis.

  25.  BBC and ITV claim that their "public service obligations" should entitle them to a reduction from the "fair, reasonable and non-discriminatory" price charged by Sky for use of its conditional access services. But no other good or service which public service broadcasters require in order to broadcast by digital satellite is purchased at such a reduced rate. Neither BBC or ITV, for example, is entitled to cheap uplink services, transponder capacity, electricity or programming.

  26.  There is no case for singling out conditional access for a special subsidy. If public service broadcasters are not prepared to accept fair and reasonable charges, they are by definition seeking charges that are unfair and unreasonable to the conditional access provider—and also to other broadcasters taking those services, who in practice would be faced with supporting a higher share of the overall costs as a consequence.

  27.  Nor is there any rationale for extending existing cable "must carry" requirements to satellite. The "must carry" obligations were imposed on cable and not satellite because of specific differences between the platforms:

    —  Cable operators have closed platforms, unlike DSat which is open. Thus, cable operators can refuse to carry non-"must carry" channels.

    —  Cable operators retail "must carry" public service channels as part of their basic packages. Even the lowest cable access tier with BBC, ITV, Channel 4 and Channel 5 carries a monthly fee, whereas these services are not part of any Sky package, and are offered entirely free-to-air on satellite. Cable operators derive revenue from supplying the public service channels; Sky does not.

    —  Cable operators were initially granted exclusive rights to provide services in their franchise areas and were subject to capacity constraints in their analogue systems.


  28.  In December 2001 the Government published a Digital Action Plan with the aim of setting out "a series of actions which need to be undertaken to ensure the switchover from analogue to digital television takes place, to identify who should lead on those issues and to set target dates for delivery."

  29.  It is essential to remember that the Government has probably the most to gain from switch-off because it will be able to auction off analogue spectrum post-switchover, although the value of that spectrum is unclear. Despite this, Government has proposed a series of measures which are likely to impact on different stakeholders in different ways—the cost of which has not been assessed. Sky believes that the Government should therefore conduct a cost-benefit analysis of analogue switch-off.

  30.  Ideally, this would have been carried out before the Digital Action Plan was published in order to ascertain whether the benefits of analogue switch-off exceed the cost of the measures deemed necessary for switchover. (Sky identified the need for Government to weigh these costs and benefits in 1995, in its response to the Government's proposals for DTT.) If the benefits—whether in terms of efficiency or Exchequer yield—of the ultimate re-use of any cleared spectrum are not measured, then there is no way of knowing whether the proposed actions are proportionate in relation to those benefits.

  31.  One of the issues which is to be examined as part of the Digital Action Plan is the transition to integrated digital televisions (idTVs). It has been argued that the Government should mandate idTVs, in effect outlawing the sale of analogue-only television sets from a future date.

  32.  The Government's Viewers' Panel looked at this issue and concluded that it would be "unwise to require that only digital televisions can be sold in future" (Viewer Choice and Digital Television, December 2001). It went on to point out that:

    —  "digital receiver architecture and software is changing rapidly, and that existing idTVs have only a limited capacity to be upgraded. Mandating the sale of idTVs might restrict innovation and could well limit viewers' access to new features developed within the lifetime of their set"; and

    —  "some commentators have suggested that television technology is likely to move away from the integrated-receiver model towards a monitor/screen plus STB (set top box) combination. An upgradeable STB could well provide viewers with a simple and cheap way to switch to digital using their existing equipment".

  33.  Sky strongly supports these views and is concerned that mandating idTV's would not be in the best interests of UK consumers for the following reasons:

    —  idTVs are more expensive than an equivalent analogue set;

    —  All consumers wanting to buy a new TV would have to pay the additional price—even those who already had a set-top box; and

    —  Consumers forced to buy an idTV may still require a set top box if they wish to access the full range of digital services available (eg full interactivity).

  34.  Last year ITV—with the support of European TV manufacturers—mounted a campaign to convince the EU to mandate idTVs in the future. In a speech to European public service broadcasters, Stuart Prebble, Chief Executive of ITV, argued that compulsory digital tuners in new television sets (the cheapest option of which is a free-to-air DTT tuner) would provide a "compelling" advantage—not for maximising consumer choice and freedom, but for public service broadcasters—because:

    "For reasons of (limited DTT channel) capacity, and our own visibility, public service broadcasters will retain a bigger share of viewing on an idTV than we will on a pay platform" (despite the availability of public service channels and other free-to-air services on DSat).

  35.  Sky believes that Government policies should not favour certain broadcasters, operators or platforms over others.

  36.  Sky supports the Government's stated position of platform neutrality. It believes that the Government should conduct a cost benefit analysis on any proposals in this area to ensure that they do not hinder the development of particular platforms or alter the commercial balance between competing operators. Sky has not asked for, nor has it received, Government assistance for the development of DSat—the platform that has contributed the most to date in terms of digital take-up and increased programme choice.

  37.  In addition, if the Government is to be genuinely platform neutral, it should not grant DTT preferential status post switchover. When analogue terrestrial broadcasting is switched off, universal coverage will be achieved through a combination of satellite, cable and terrestrial distribution—with consumers having a choice of one, two and sometimes three platforms. No consumer will be denied access to public service broadcasting channels, including regional services, post switch-off.

  Sky looks forward to participating in, and contributing its experience to, the Stakeholders' and Task Groups established under the Digital Action Plan.


  38.  The OFT first started investigating Sky in 1995 and it has been more or less continuous ever since. The OFT initially indicated that it would commence its current investigation into Sky in December 1999 (then under the Fair Trading Act, and later under the Competition Act.)

  39.  Despite the time that has elapsed, only in December 2001 has the OFT given Sky the first indication of the allegations against it. Sky has now—for the first time—an opportunity to respond to those allegations. No decision is expected before summer 2002.

  40.  The OFT has taken the preliminary stance that Sky has abused its alleged dominant position (in a market identified by the OFT as the wholesale market for premium movie and sports channels) through the prices it has charged distributors over the period which the OFT are investigating (March 2000 to June 2001). During this period Sky acted responsibly at all times, keeping the OFT fully informed of its actions.

  41.  In 1996, the DGFT had sought and obtained undertakings from Sky which, inter alia, required Sky to contract with cable operators for the supply of certain of its channels only on the terms of a rate card, the discounts under which had been approved by the DGFT. Sky was not entitled to contract with cable operators for supply of these channels on any other terms. In addition, in order to guard against potential for margin squeeze, Sky undertook to comply with an accounting separation test, separating the accounts for its broadcasting business from its DTH retail business according to the methodology laid down by the OFT.

  42.  Despite Sky's requests, the DGFT has not, to date, formally released Sky from the key provisions of these undertakings. During the period under review, therefore, Sky complied with these undertakings by offering its channels only on the terms of the DGFT-approved rate card, and it applied the OFT's accounting separation test to its retail business.

  43.  However, the OFT notified Sky in December 2001 that implementing the discounts in Sky's cable rate card (which the DGFT approved and required of Sky) is an abuse of Sky's dominant position. The OFT has also developed a new accounting separation test for margin squeeze, communicated to Sky only in December 2001, which is different to the accounting separation test that it had previously imposed on Sky. The OFT is now seeking to impose this new test on Sky retrospectively.

  44.  Sky contends that a UK regulator cannot seek undertakings from a company which require it to observe certain behaviour and later accuse that company of abusive behaviour by compliance with those undertakings. Sky will be defending its position vigorously in the months to come.

  45.  Overall, it is difficult for Sky to have confidence in a regime where the body sitting in judgement (the OFT) is also conducting the prosecution. Sky has a right of appeal from the OFT's decision to the Competition Commission Appeals Tribunal. Sky will utilise that option if necessary.


  46.  In December 2001 the BBC submitted a new application for BBC3, a new licence-fee-funded digital television service to replace the evening schedule on BBC Choice. The proposal was submitted following the Secretary of State's decision three months earlier not to approve the original BBC3 proposal.

  47.  The BBC claims that this new public service channel for young adults (25-34s) will drive digital take-up and thus help to facilitate analogue switch-off. There is no credible evidence to support this assertion—the BBC's research asked "motherhood and apple pie" questions, which revealed only that some people might be more interested in digital TV as a result of BBC3, but said nothing about whether it would actually make a decisive difference to their intentions.

  48.  If driving take-up was a key objective for a new BBC service, it is hard to see why the BBC would target this audience, who already have higher multi-channel television penetration than almost any other age group.

    —  More than 60 per cent of 25-34 year olds are already multi-channel cable, satellite or digital terrestrial television viewers.

    —  Of the remaining analogue terrestrial-only 25-34s, over 40 per cent already intend to purchase digital.

  49.  Resources targeted at those regarded as the core "digital refusniks", the less well off and those over 55, would be more logical than the creation of a service that seems to be designed for this polar opposite group.

  50.  The BBC also wrongly claims that 25-34 year olds are not currently well served by the commercial sector. While no other single digital channel may have the same mix of genres or Government-granted budget for original content, over a range of services they are already very well served. Indeed, there is some suspicion that it is because they are so well served that the BBC wishes to launch its own offering to compete in the market place.

  51.  The Committee has previously expressed interest in the viewing figures for new BBC digital services generally, and also the performance of BBC News 24 as compared to Sky News. Annex 3 provides updated information. Among other things this shows that:

    —  The BBC's new digital channels—in aggregate—continue to account for less than one per cent of all UK television viewing and less than two per cent of television viewing across multi-channel cable, satellite and digital terrestrial homes.

    —  On average, fewer than two in 10 viewers in multi-channel homes watch any one of the BBC's new digital channels for more than three consecutive minutes per week.

    —  Sky News continues to attract a higher share of viewing than the BBC's dedicated news channel across multi-channel cable, satellite and digital terrestrial home—despite the fact that BBC News 24 reaches more than 1.2 million additional homes through Government-granted DTT capacity that is unavailable to Sky News.

    —  In Sky Digital homes, where Sky News and BBC News 24 are equally available, Sky News' share of viewing is nearly three times that of BBC News 24, despite the constant cross promotion afforded to BBC News 24 across the BBC's (universal) analogue and digital television and radio services.

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