Joint Committee on The Draft Communications Bill Minutes of Evidence


APPENDIX 1

Supplementary memorandum submitted by BSkyB

  At Sky's oral evidence session on 24 June 2002, a number of questions were asked about issues on which it appears appropriate for Sky to offer supplementary comments. These issues are:

    —  cross media ownership;

    —  dominance;

    —  third party channels; and

    —  vertical integration.

1.  CROSS MEDIA OWNERSHIP

  At Sky's oral evidence session, Mr Farrelly asked whether the Government should be consistent in its approach to cross media ownership of Channel 3 and Channel 5.

  Sky believes that the existing cross media ownership rules in their entirety are outdated, arbitrary and discriminatory. As Sky noted in its Memorandum to the Joint Committee, issues of ownership and mergers are already subject to competition law approvals and ex ante sector specific rules are unnecessary in relation to ownership of both Channel 3 and Channel 5. [16]Furthermore, impartiality requirements remain in the draft Bill to preclude any possibility of proprietor influence over editorial content.

  However, Sky does not support an "all or nothing" approach to deregulation. The removal of the cross ownership rules on Channel 5 is sensible even if the Channel 3 anomaly were to remain. Two wrongs do not make a right and it would be nonsensical to reintroduce restrictions on ownership of Channel 5 simply to achieve consistency.

  Sky notes that fears have been expressed that somehow it—uniquely—could in future purchase Channel 5 and "turn it into ITV". The idea that Sky, but not AOL/Time Warner or Bertelsmann, could achieve this borders on anti-Sky hysteria. In any event, Channel 5 is a non-universally received channel with a programming budget which, even if doubled or trebled, would remain only a fraction of ITV's. Channel 5's share of television advertising revenue would also remain only a fraction of that of ITV, even if doubled or trebled.

  Furthermore, there are no rational grounds for attempting to bar any potential Channel 5 owner on the basis that it might make the service "too successful"—particularly given the Government's overall aims to open up the industry to additional sources of capital and expertise, in order to "make sure that the UK is home to the most dynamic and competitive communications market in the world".[17]

2.  DOMINANCE

  Joint Committee members mentioned the issue of "dominance" a number of times in Sky's oral evidence session. For instance:

    —  Baroness Cohen of Pimlico asked whether Sky would prefer to leave platform ownership regulation to OFCOM, "Given that Sky has a dominant position in the market" and is "dominant on platform ownership".[18]

    —  Mr Lansley asked whether the best way of "dealing with a situation of dominance" is "sometimes. . . to deal with the structure of the dominant operator" and stated that Sky, "as the dominant operator in relation to digital television, in institutional terms still have one company, which is both a platform provider and a channel provider".[19]

    —  Mr Grogan suggested that competition and market entry for broadcasters was impeded because of Sky's "dominant position".[20]

  Sky is not aware of competition authorities determining that "digital television" comprises a relevant market, or that anyone has been determined "dominant" in respect of it. Clearly, in the television market, which includes the BBC, ITV and others, Sky is not dominant. Sky's channels as a whole attract a viewing share of around 6 per cent compared to the BBC's 38 per cent and ITV's 27 per cent. [21]

  Neither, in the context of the OFT's ongoing Sky investigation, has Sky been held to be dominant in the narrower market for the wholesale supply of pay TV which the OFT has defined. "Central to this investigation", the Director General of Fair Trading recently stated, "have been questions about whether BSkyB has a dominant market position in relation to the wholesale supply of premium sports and film content, and if so whether its pricing policies have abused that position" (emphasis added). [22]Thus, at this stage, no formal conclusions have been reached by the OFT on BSkyB's market position. Moreover, at the retail level, the OFT has not defined a relevant market at all, let alone decided that Sky is dominant in it.

  In terms of platform ownership, although ownership of platforms has not been specifically defined by any regulator as a "relevant market", it is nevertheless the case that in respect of Sky's control of the satellite platform's conditional access system Sky is regulated under a regime acknowledged by the regulators to be an efficient one, so to the extent that any relevant platform market were defined, and Sky were held dominant in it, an adequate ex ante regime already exists to deal with this.

  Furthermore, it is important to recognise that the holding of a dominant position is not prohibited by competition law. It is the abuse of a dominant position, not the position itself, which is prohibited. This is contrary to the impression observers of the Joint Committee might receive from some of the oral and written evidence submitted to it, suggesting that dominance itself is a problem and that it should perhaps be OFCOM's role to "get rid of it".

  In particular, OFCOM's duty to promote competition should not be used to attack the market position of allegedly dominant companies who are not guilty of any abuse. As Sky has also explained elsewhere, a regime for dealing with abuse of a dominant position exists under the Competition Act, and it is these powers (together with those under the Fair Trading Act) which should be used in those circumstances, not the powers arising from OFCOM's duty to promote competition.

3.  THIRD PARTY CHANNELS

  Mr Grogan suggested that competition and market entry for pay TV channels was impeded because of Sky's "dominant position" and the fact that "most of them [third party pay TV channels] end up doing deals with you".[23] As an example, he said:

    "It would be quite difficult for me to launch my cricket channel, let us say, because of your dominant position." [24]

  Digital satellite is an open platform. Broadcasters can obtain capacity from a relevant satellite operator (SES or Eutelsat) and retail or otherwise provide their own channels independently of Sky's pay TV packages. This is achieved through access being made available to the EPG and, where appropriate, through the provision of conditional access services (encryption, entitlement and regionalisation). The relevant BSkyB companies are required to provide these services on a fair, reasonable and non-discriminatory basis. As Sky noted to the Joint Committee, it has entered over 180 agreements with third parties for these regulated services.

  The satellite platform currently supports more than 380 TV and radio services, of which Sky owns only 10 (or 20 if the timeshifted versions of its movie channels are included), plus a pay per view movie service. The vast majority of the rest are third party services unconnected to Sky who are legally entitled to distribute their services on the satellite platform. As of 4 July 2002 the services on the satellite platform were made up of:

    —  84 basic TV and radio services;

    —  59 premium, bonus and a la carte TV and radio services;

    —  79 free to air TV channels;

    —  56 free to air radio channels;

    —  13 subscription channels (not retailed by Sky);

    —  80 pay per view channels;

    —  three customer/barker channels;

    —  nine interactive services (four of which are Sky services).

  There are currently approximately 160 services not retailed by Sky on the digital satellite platform, including third party subscription channels such as Sony TV Asia, B4U Movies, Zee TV, Zee Music, Zee Cinema, Pakistani Channel, Prime TV, Playboy, Adult, Fantasy, Ekushey TV, Sirasa and Tantalise.

  Furthermore, Sky sometimes retails subscription channels on behalf of third parties (eg The Disney Channel, Film Four). The fact that these channels are retailed by Sky reflects their wish to take advantage of Sky's marketing and retail expertise. It is not anti-competitive in any way and has helped facilitate, rather than foreclose, entry. Nor does it detract from the option a broadcaster has to retail its service(s) itself—a choice denied to it (and to Sky) on all other platforms.

  Sky has no ability to stop Mr Grogan's cricket channel, or indeed any new entrant, from launching and retailing competitive channels independently of Sky's pay TV packages. Nor is Sky incentivised to foreclose others' entry. Sky has spent £2 billion in the hope that the digital satellite platform will be a success—and consumer research consistently shows that the main reason why people subscribe to digital pay TV is for the proposition of wide choice. Therefore, the more services on the satellite platform, the more chance Sky has of making a success of the platform and ultimately making a return on its investment.

  The ability of any broadcaster to launch and retail competitive channels on digital satellite is in contrast to closed platforms like cable, in which cable operators are able to deny access to third party services, including those that compete with platform operators' own services. For example, Sky's pay per view movie services are unable to get carriage on UK cable systems because the cable operators run their own pay per view service, Front Row, and they do not want any competition to it on their networks. Were they to choose to supply their own Front Row service via satellite, however, they would be guaranteed access.

  Earlier this year a number of MPs queried the non-availability of the ITV Sport channel on digital satellite. It is important to note that ITV deliberately withheld the ITV Sport channel from satellite viewers whilst adopting a policy of blaming its lack of availability on Sky. [25]Had ITV decided that it wanted to make ITV Sport available via digital satellite, it could have adopted one of two approaches. It could have reached agreement with Sky for inclusion in Sky's retail packages. [26]Or, it could retail the channel itself by taking conditional access services from Sky.

  Sky has facilitated, rather then impeded, competition and market entry in UK broadcasting through its successful establishment of an open satellite platform already reaching nearly 6 million UK homes.

4.   VERTICAL INTEGRATION

  Some of Sky's competitors, particularly the terrestrial broadcasters, have been trying to create political momentum behind the idea that Sky's ownership of programme content, and the fact that it has invested in building the satellite platform, is somehow a "problem" that needs "a solution". However, no one can actually point to any distortion of competition to back up their claims.

  It is notable that the Government sees no problem and the draft Bill makes no proposals to interfere with the structure of the market by forcing a split of content and platforms.

  The Government has recognised that Sky's ownership of content incentivised it to build a platform and has actually created competition and encouraged entry at an unprecedented rate. The White Paper also noted that a ban on vertical integration would "slow down the necessary investment in high speed networks".

  Yet the suggestion has arisen a number of times in the course of the Joint Committee's sessions that Sky will use its content to favour its platform and its platform to favour its content, to the detriment of competition.

  Not only does neither of these things happen in practice—but the suggestion discloses a fundamental lack of understanding of what drives Sky. Sky has no incentive to do either of these things.

  Take the potential use of content to favour the satellite platform.

  Sky's business is based largely on fixed costs. For example, Sky pays for all its sports rights on a fixed rights fee basis and Sky takes all the risk that it will be able to attract enough subscribers to pay for the rights and make a return on its investment. To have the best chance of doing this Sky needs to obtain distribution to as wide a base of consumers on as many of the existing distribution platforms as possible.

  The suggestion that Sky would like to deprive third party platforms of its programming, or price them so that it is difficult for third party platforms to sell them, totally ignores the commercial reality, which is that Sky needs wide distribution to cover its costs. Sky has no subscriber acquisition cost for subscribers signing up to other platforms. Last year Sky's wholesale revenues from distribution of its channels on cable and DTT was £300m—and most of this goes straight to the bottom line.

  That the economics of high fixed cost channels cannot work unless the broadcaster is willing to distribute on all platforms can be seen from the experience of ITV Digital. It made the decision to keep ITV Sport off the satellite platform to try and advantage its DTT platform, and collapsed under the weight of the hundreds of millions of pounds of investment it had made in Football League rights.

  Sky has also campaigned for open access to cable platforms to try and ensure that it can be sure of getting its channels distributed. This would be irrational behaviour for a broadcaster seeking to withhold, not supply, its channels.

  Next, consider how Sky could use its platform to favour its channels.

  Sky undertook massive investments in launching the satellite platform in full knowledge that it could not reserve all the capacity to itself or deprive others of access. Sky does not control "capacity" on the satellite platform. Capacity comes in the form of satellite transponders—which are in abundance—and they are leased directly from SES (Astra) and Eutelsat, satellite operators which are unconnected to Sky.

  What Sky controls is the ability to switch on and off satellite viewers' smartcards which reside in their set top boxes according to the channels they are entitled to see. This capacity is not constrained and so there is no need or ability for Sky to "reserve" any capacity for its own channels.

  Sky also launched the platform in full knowledge that access to digital satellite platforms would be regulated through the fair, reasonable and non-discriminatory access requirements of the Advanced Television Standards Directive, and regulated by Oftel in the UK. Furthermore, even before digital—in the relatively unregulated analogue satellite world—Sky made its platform available to third party broadcasters just the same.

  As noted earlier, Sky has invested vast sums in the hope that the platform will be a success. Consumers principally subscribe to digital pay TV for the proposition of wide choice—so the more services on the satellite platform, the more chance Sky has of making a success of the platform and ultimately of making a return on its investment. Sky has absolutely no incentive to "shoot itself in the foot" by denying access, even if this were legally possible. Such a strategy would only serve to damage a platform in which it has invested £2 billion, by making it less attractive in comparison to other platforms' offerings.

  Therefore, to summarise:

    —  Sky needs wide distribution for its channels to recover its costs, which are largely fixed;

    —  access to the satellite platform is available to all comers on fair, reasonable and non-discriminatory terms regulated by OFTEL—no one has been denied such access;

    —  there is no capacity constraint—supply of transponder capacity is plentiful and not controlled by Sky;

    —  Sky has no incentive to deny access to the satellite platform because it is trying to make a success of it—and the more services on offer the better.

  At the heart of the draft Communications Bill are fundamental principles under which "regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed"[27], and regulation must not impose or maintain burdens which are, or have become, unnecessary[28]. It is essential that the Joint Committee apply these principles to its assessment of alleged problems and does not unjustifiably call for further intervention in areas such as the issues above.

July 2002















16   As clarification of Mr Ball's evidence regarding Sky's ability to acquire Channel 3, his comments "I would think that if we were buying Channel 3 on competition grounds we would not be able to do that anyway, so you do not need that [cross media ownership] rule" and "If the rule was not there, we would have difficulty anyway" were intended to impress on the Joint Committee that any attempt by Sky to do so would be met with intense regulatory scrutiny, most likely in the form of a Competition Commission inquiry. It was not intended to infer that the outcome of any such scrutiny would necessarily preclude a Sky purchase of Channel 3. Back

17   Foreword to the Communications White Paper. Back

18   Uncorrected transcript, paragraph 617. Back

19   Ibid, paragraph 624. Back

20   Ibid, paragraph 636. Back

21   Most recent published ITC Audience share Figures for the 12 months ended 31 December 2001. All figures rounded. Back

22   Speech by John Vickers, IEA Conference on The Future of Broadcasting, 24 June 2001. Back

23   Uncorrected transcript, paragraph 636. Back

24   Ibid. Back

25   Last year, Gerry Murphy, Chief Executive of Carlton, told Mediaweek (25 June 2001) that ITVDigital would have more sport than any other platform because of its exclusive distribution of the ITV Sport channel, whilst Rob Fyfe, Chief Operating Officer of ITVDigital, told the Daily Mail (26 July 2001) that he had "been fighting long and hard" to keep ITV Sport exclusive to ITVDigital. Back

26   Sky offered ITV terms for such a distribution deal but ITV declined to negotiate. As the Financial Times reported (16 June 2001): "Some ITV executives, led by chief executive Stuart Prebble, are thought to be reluctant to share the content with BSkyB, as they see it as key to attracting new [DTT] subscribers." The Daily Telegraph also reported (16 January 2002) that "Champions League football will not be made available to Sky viewers after the ITV Sport channel pulled out of talks to join the broadcaster's digital platform." Back

27   Clause 3(2)(a). Back

28   Clause 5(1). Back


 
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