Supplementary memorandum submitted by
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
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).
2.1 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
"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
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
". . . 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
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
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
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