Select Committee on Culture, Media and Sport Appendices to the Minutes of Evidence


Annex

1.  THE EFFECTS OF VERTICAL INTEGRATION

  Alan Keen in his questions to Mr Ball identified a concern from a public interest and competition perspective about BSkyB's vertical integration from content activities through to distribution activities. The concern, put simply, is that because BSkyB undertakes both these activities it can use its market power in one area to undermine its competitors in the other.

  BSkyB can do this in different ways. Firstly, it can use its control over premium sports and movie programming to give its own digital satellite platform an unfair advantage over cable and digital terrestrial in the battle for new subscribers. Secondly, it can use its dominant position in pay television distribution to prevent the establishment of effective competition to its own channels by denying potential competitors, such as ITV Sport, viable access to satellite distribution.

  Mr Ball correctly identified that there are processes in place that seek to address these problems. The first, the availability of premium sport and movie content to other platforms should be regulated by the Office of Fair Trading. The second, access for other broadcasters to the satellite platform is, in theory, regulated by Oftel's conditional access pricing rules. Where we disagree with Mr Ball is about the extent, nature and current effectiveness of either of these regimes.

OFT

  The OFT has never regulated the prices that BSkyB charges cable or ITV Digital for its premium sport and movie channels. It did obtain from BSkyB, in 1996, informal non-legally binding undertakings in lieu of making a reference to the Monopolies and Mergers Commission. These undertakings (1) allowed for certain information to be provided to the OFT and (2) gave some guidance on the structure of BSkyB's prices. Subsequently, the OFT announced in December 2001 that it is minded to find that BSkyB has breached the Competition Act in relation to its pricing of premium channels to both cable operators and ITV Digital. This confirms that the undertakings did not regulate the level of BSkyB's prices as Mr Ball appeared to have suggested to the Committee.

OFTEL

  Mr Ball said that the conditional access (CA) ratecard is regulated by Oftel. In our own discussions with Oftel they have denied this—rather they have said that only in the event of a complaint could they intervene in BSkyB's pricing. Oftel have not yet published any information about BSkyB's underlying CA costs or made any assessment of whether those costs are reasonable. Oftel is currently in the process of reviewing its guidelines in this area and will then have to settle ITV1's complaint—for the first time therefore it will be necessary to go through BSkyB's claimed CA costs. This would suggest that BSkyB has not, to date, been regulated as tightly by Oftel as Mr Ball claims.

  In our detailed response to Oftel's recent consultation on its CA Guidelines we identified a number of ways in which we believe BSkyB's current ratecard is designed to favour its own channels. For example, it imposes a price on potential providers of an alternative premium sports package (such as ITV Sport) equivalent to that paid by the entire BSkyB package of over 150 channels (£2.50 per month per subscriber). Accordingly, it is currently uneconomic for ITV Sport to use the conditional access route (as Mr Ball has suggested is possible) as, at ratecard levels, around 42 per cent of any customer revenues would have to be paid to BSkyB in CA fees before any other costs could be met.

  We would also direct the Select Committee's attention to the comments submitted to Oftel by MGt Plc. MGt refers in its submission to a consultation it pursued amongst its own clients, which represent the majority of independent pay TV broadcasters currently using the UK's digital satellite platform. At page 2 of their submission, MGt state:

    "In responding to Oftel's document, we first challenge the stated opinion that the regulation of CA pricing to date `has been successful in attracting a large range of content for the consumer'.

    This is quite simply not the case. Oftel's published aim in seeing that consumer choice and competition are maximised is not being realised under the existing regime. In the three and a half years since the launch of Sky Digital, neither competition nor choice have materialised in the content areas that are most important to the dominant broadcaster on Digital Satellite (BSkyB), namely sport and movies. There remains, for instance, absolutely no effective competition for BSkyB's own Sky Sports channel packages, and in movies competition is limited to Film Four."

  Effectively, the BSkyB wholesale ratecard for conditional access charges has erected an insurmountable barrier for anyone seeking to compete with BSkyB's core monopoly businesses in premium sport and premium movies. We believe that this is the precise intention of BSkyB's strategy. The claim that BSkyB's platform is, in any meaningful sense, "open" is simply inaccurate.

  To summarise, Mr Ball suggested that because of the existence of the OFT and Oftel regulatory regimes, the Select Committee need not be concerned with BSkyB's market power. However, prior to December 2001, interventions by the OFT and Oftel failed to adequately address the problems of vertical integration in pay television broadcasting. As a result, BSkyB has been able to exercise market power largely unrestrained by concerns over the legality of its behaviour or the threat of competitive entry. This has left prices for pay TV artificially high and choice and competition artificially limited. Although we look forward to the resolution of the OFT's investigation and revised Oftel guidelines, we believe that the key points for the Committee to take note of are:

    —  the time that it has taken for these issues to be properly addressed;

    —  the confusion and lack of transparency which BSkyB has benefited from; and

    —  the relatively limited resources of the regulators compared to those of BSkyB.

  All of these matters may be something which the Committee may properly wish to comment on in its report.

2.  COMMERCIAL NEGOTIATIONS FOR ITV SPORT CHANNEL

  Mr Ball claimed in his oral evidence that BSkyB had reached a deal with ITV for carriage of ITV Sport on the satellite platform and that ITV had "changed their mind at the last minute". This is simply not true.

  Mr Ball is correct, however, in stating that ITV has sought a minimum guarantee from BSkyB in relation to the carriage of ITV Sport should it license ITV Sport to BSkyB for inclusion within its retail package. BSkyB would have much to gain from the failure of ITV Sport. As ITV's principal competitor in the provision of premium sports programming it would have every incentive and ability to restrict the availability and limit the marketing of ITV Sport to potential satellite customers. We believe that the only way that we can ensure a reasonable chance of success for ITV Sport is for BSkyB to be sufficiently incentivised to sell ITV Sport against its own premium sports programming. This can only be achieved by agreeing a minimum guarantee at the outset.

3.  CHANNEL HOLDBACKS

  Mr Ball said that the ITV Digital shareholders had taken the strategic decision to "pepper" DTT's limited spectrum resource with their own channels instead of signing up channels that were attractive but more expensive.

  This is an inaccurate description of what actually happened at the time of DTT launch in the UK. When BSkyB was ejected from the BDB consortium, we believe it ensured that many of the significant basic channel providers entered into restrictive (and arguably illegal) agreements which prevented those channel providers offering their channels to DTT.

  For example, BSkyB entered into agreements with Discovery Communications Europe preventing the carriage of the Discovery Channel on digital terrestrial until 2006 at the earliest. In 2001, more information became available about these agreements (which had been filed at the OFT) and ITV Digital made a formal complaint to the European Commission in the summer of that year.

  Following the Commission's preliminary investigation BSkyB agreed (on a without prejudice basis) to renegotiate the restrictive arrangements that it had entered into. As a result, ITV Digital was finally able to launch the Discovery Channel on DTT in November of 2001. Discovery is one of the most popular basic channels in the UK and the lack of that channel put ITV Digital at a serious disadvantage when competing for new subscribers against Sky's own digital offering.

  BSkyB had, we believe, intentionally sought to undermine ITV Digital as a potential new competitor to satellite by denying it access to attractive content provided by third parties. This strategy was most effective during the first two crucial years of ITV Digital's life when many BSkyB subscribers were upgrading from analogue to digital and may have considered an alternative platform. The European Commission's investigation is ongoing.

4.  CARRIAGE OF ITV1 ON SATELLITE/MUST CARRY

  ITV maintains that the principal beneficiary of carriage of ITV1 on satellite is BSkyB and that therefore, in a competitive market, no payment would be due to BSkyB (in fact the reverse might be true as occurs in other countries). This is why we refused to pay the CA charges demanded by BSkyB and have asked Oftel to settle this disagreement. Oftel acknowledges that the value of the public service channels to pay television operators such as cable operators is significant.

    "3.25 It has to be noted, however, that there is a benefit to the cable operator in the carriage of `must carry' channels. These have some of the highest viewing by consumers and there is a high level of consumer expectation that such channels will be available. It is possible that without the `must carry' arrangements platform operators would have to pay a considerable amount to public service broadcasters for these channels."

  The satellite platform benefits from carrying the public service channels in the same way as cable. Despite this, under the current regime BSkyB was able to demand some £17 million pounds per annum for carriage of ITV1. At no stage has BSkyB provided any information on how this ratecard price has been derived, nor is it in any way related to the incremental direct costs of providing the CA services, which we estimate to be less than £100,000. This £17 million therefore constitutes almost pure profit for BSkyB, yet it has not been able to provide any reasoned argument why public service broadcasters should cross-subsidise BSkyB's platform when it is perfectly capable of recovering these costs from its own subscribers activities. Neither cable nor digital terrestrial benefits from a similar cross-subsidy.

  This is why we continue to believe that the only platform neutral way of achieving the Government's public policy objective of universal access to public service channels is to replicate the White Paper's proposals for must carry on cable networks as closely as possible on the satellite platform.

5.  THE "DIGITAL DIVIDEND"

  BSkyB has argued that it should be entitled to charge ITV CA charges which take into account the "digital dividend" received by ITV. As we have made clear to Oftel in ITV's submission on conditional access, the "digital dividend" is a reduction in ITV's payments for analogue spectrum to reflect the reducing value of that spectrum as homes migrate to multi-channel viewing and the consequent reduction in advertising revenue received by ITV. It was not intended as a subsidy for the already dominant pay television operator, BSkyB as confirmed by the ITC's evidence to Oftel.

6. BSKYB AND "PLATFORM NEUTRALITY"

  BSkyB makes much of encouraging "platform neutrality" by the Government. However, its own behaviour as the dominant provider of premium programming for pay television has, in our view, been anything but "platform neutral". For example:

    (a)  The core abuse identified by the OFT in December last year (the "margin squeeze") is that BSkyB has charged ITV Digital and the cable operators much higher prices for premium programming than it charges its own distribution business. This has the effect of artificially favouring the satellite platform over other platforms.

    (b)  Similarly BSkyB's charges for CA oblige public service broadcasters to subsidise Sky's platform when no similar subsidy is given to cable or DTT. The BBC's evidence to Oftel states as follows:

    "S6. Public Service Broadcasters (PSBs) are effectively subsidising the rollout of Sky Digital boxes, whilst other platforms (digital cable and digital terrestrial) receive no such subsidy. This is caused by the fact that of the three digital television platforms, only the satellite platform requires a conditional access system for public service broadcasters. BSkyB charges more than incremental cost for this service, thereby enabling it to support its subsidy of the rollout of Sky Digital boxes. PSBs have no control over the decision to subsidise boxes on any of the three digital platforms and it is quite wrong to require them to contribute to STB box costs on one platform."

  BSkyB therefore both prefers its own business and seeks to ensure that Government policy fails to reflect the genuine technical differences between platforms—issues which do justify different treatment (see below).

7.  THE EFFICIENCY OF THE DTT PLATFORM

  Mr Ball questioned the viability of DTT and claimed that it had "got off to a pretty bad start everywhere".

  In the UK, the DTT platform has grown from scratch faster than any multi-channel platform in the world, with ITV Digital acquiring its millionth customer faster than any of its rivals and faster than Orange or Vodafone. In the EU, every country bar Luxembourg has already introduced, or plans to introduce, DTT. One only has to consider how many households in Europe still rely entirely on terrestrial reception—over 50 per cent or some 75 million—to understand DTT's potential.

  One of the key advantages DTT has over other delivery platforms is cost. For example, if the UK Government's policy is to replicate in digital the current universal availability of analogue terrestrial television, then DTT is by far the cheapest way to do so. Digital satellite and cable are inherently more expensive technologies.

  In November 2001 ITV commissioned independent research to estimate the costs of achieving near universality of digital reception with a combination of different platforms:

    —  cable/satellite only;

    —  current DTT power levels/cable/satellite; and

    —  higher DTT power levels/cable/satellite.

  The estimated costs of 1) meeting the Government's switchover target of 95 per cent of the population with access to digital television through one of their TV sets and 2) all sets being converted to digital, were as follows:

Scenario
Capital
(£ million)
Recurring pa
(£ million)
Annualised
(£ million)*
95 per cent access, cable/satellite ONLY
1,544
N/A
308.0
ONE TV SET ONLY
95 per cent access, cable/satellite/current DTT
1,050
N/A
210.0
ONE TV SET ONLY
Quasi-universal digital service (95 per cent) cable/satellite ONLY
7,822
2,400
3,964.0
ALL SETS
Quasi-universal digital service (95 per cent) cable/satellite/current DTT
4,614
N/A
923.0
ALL SETS
Universal digital service (99 per cent) cable/satellite/higher power and coverage DTT
3,940
N/A
788.0
ALL SETS
* Amortised over five-year conversion period.


  The research concluded that using DTT to deliver the public objective of universal coverage of digital television would cost less than one quarter the cost of delivering the same objective using cable and satellite alone. Furthermore, only DTT will be able to offer mobile and portable reception of digital television. A truly platform neutral policy should not ignore the genuine technological advantages of DTT and what DTT can uniquely offer in the public interest compared with other distribution mechanisms.



 
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