VIRGIN MEDIA’S RESPONSE TO THE BBC TRUST’S REVIEW OF YOUVIEW

Introduction

Virgin Media welcomes the opportunity to provide this submission to the BBC Trust as part of its Review of YouView (the “Review”).

YouView today is a fundamentally different proposition from that which was approved by the BBC Trust in June 2010 (the “Approval”). YouView has, in effect, developed as a publicly sponsored pay-TV platform supporting the commercial offers of BT and TalkTalk. An estimated 90% of YouView set-top boxes have been sold by these two highly profitable ISP partners as part of their bundled telecommunications propositions. In contrast only 10% have been sold through independent retail channels. In addition, despite claiming to be open, no set top box manufacturer (other than the BT/TalkTalk manufacturer) or IP Connected TV manufacturers have adopted the “standard” and the only ISPs to have been involved have been the two shareholders.

The proposition which was approved was “a joint venture intending to develop and promote a standards based open environment for internet-connected television devices." The original mission statement – that YouView acts as a vehicle for new innovative functionality not provided by the market – is not reflective of its current functionality, which does not constitute a “significant enhancement” to commercial propositions. Certainly, developments in Freeview undermine the “distinctiveness” of YouView and that, together with other market developments, call into question whether YouView amounts to any “significant enhancement”.

As a result, the introduction of YouView into an already competitive, well- functioning and innovative UK pay-TV market is acting against the best interests of consumers in two key ways:

• Undermining competition in consumer access to “must have” content – either by building heavy incentives for YouView’s content partners to favour YouView’s platform partners in the syndication of content; or by contributing to driving smaller British platforms out of the market1. • Slowing the pace, or restricting the extent of innovation in delivery of content.

To ward against these two risks – and to keep up with a fast evolving market – it is vital that the BBC Trust (together with the competition authorities as

1 In the intervening period since the Approval, pre-existing market participants have been driven out of business e.g. IP Vision. See for example: http://www.broadcastnow.co.uk/news/finance/set-top-box-maker-ip-vision- enters-administration/5037003.article necessary) maintains regular and vigorous oversight of YouView and the BBC’s participation in it through annual reviews. An ongoing role for the BBC Trust properly reflects not only the BBC’s fundamental role in the initial research and development of what was Project Canvas, but also the significant licence fee funding of the venture and the continued implications that YouView has in relation to consumer access to licence fee funded content. This oversight is required particularly given that the market impact assessment carried out at the time of the approval was carried out based on a different premise. Also, it is clear from recent statements by the BBC, that iPlayer will play a pivotal role in the future delivery of licence fee funded content (e.g extended catch up, additional radio channels) and the BBC Trust should therefore be very alive to the impact this will have on all platforms, particularly where this content will be part and parcel of YouView, and where innovation might be hindered.

In this Review, given the fact that it is not possible for market competitors to have full oversight of YouView arrangements, there are a number of critical issues where the BBC Trust should aim to establish greater transparency:

a. YouView’s future product roadmap and the BBC’s role in the R&D and funding of that; b. How Youview will implement the highest standards of accessibility and usability features; c. The terms on which BT and TalkTalk have gained access to syndicated content from YouView content partners and how participation in the venture is affecting incentives to syndicate more generally; d. The BBC’s ability to apply the Cross Promotional Code in an equally rigorous manner across the market; and e. The full public disclosure of the BBC’s original and ongoing expenditure in regards to the venture, as set out in the conditions for Approval.

Accessibility and usability

BBC Trust’s Question: Does YouView provide the full range of accessibility and usability features that were envisaged at launch and do these deliver all of the intended benefits?

Prior to launch, it was envisaged that YouView would be the vanguard in terms of creating and developing standards which would promote innovation and design for internet-connected television devices; with expectations being set that they would exceed those set by commercial operators. The Trust’s Approval noted that “particular value lay in the aspects of the proposals designed to make these technological developments as accessible as possible to all audience groups”.

However, for the most part, YouView has been playing catch-up to try and implement standards which match those already implemented by commercial platform operators. This being said, Virgin Media acknowledges, and is encouraged by, YouView’s recent efforts to implement the necessary changes to ensure the intended benefits are now being met. At present, Virgin Media understands these only apply to approximately 10% of YouView set-top boxes, i.e. those purchased through the retail channel rather than those supplied by BT and TalkTalk2.

2 www.cable.co.uk/news/youview-aims-to-improve-accessibility-with-new- update-801641672 The BBC must now ensure that YouView continues to implement and maintain the highest standards across all YouView set-top boxes so as to provide the full range of accessibility and usability features going forward.

As a general point, Virgin Media expects the BBC to take the lead and ensure that the other YouView partners embody the EU Regulations regarding accessibility together with the UK’s Equality Act 2010. There should be clear plans put in place and targets set. These targets should be published so as to enable a level of transparency and accountability.

Syndication

BBC Trust’s Question: Does YouView have any effect on the incentives of joint venture partners to syndicate their content to other platforms?

As originally set out in its submissions to the BBC Trust in 2009, Virgin Media’s concern remains that the YouView partners have an incentive to favour their own platform in terms of the distribution/syndication of content to other pay-TV platforms. However, as with other stakeholders in the industry, Virgin Media is constrained in the detail it can provide to the BBC Trust since it does not have access to all of the necessary information. Instead, it is wholly reliant on the information which is available in the public domain and its own internal data – both of which are insufficient to carry out a full effects-based analysis of the joint venture’s arrangements. It is therefore incumbent upon the BBC Trust to use the current review process to gather as much information as possible and ask relevant questions of each of the YouView partners to ensure the conditions concerning syndication are being satisfied.

Each of the YouView partners is a very significant player in the broadcasting or wider telecommunications markets. In particular, the YouView PSB partners provide “must have” content, essential for the operation of any major platform in the UK. Virgin Media (and, indeed, any actual or potential TV-service provider in the UK) is therefore heavily reliant on the content of each of the YouView PSB partners in order to be able to offer an attractive VOD service. There are no realistic substitute suppliers of the type and range of content provided by the YouView PSBs (i.e. Virgin Media has limited "outside options" other than to rely on the YouView partners for content). By withholding content from other platforms (or providing it only on less- or un-economic terms or via bespoke or complex mechanisms) the PSBs would be better placed to prefer their own platform and protect their audience share (and any related revenues, such as advertising and in particular, VOD advertising). The YouView PSBs therefore have a direct economic incentive to favour the venture as it provides a platform over which they can dis-intermediate traditional aggregators, such as Virgin Media, and keep 100% of their advertising revenues. As we understand it, none of the PSBs are charging the YouView venture for access to their VOD content, whilst at the same time continuing to charge other platform operators, including Virgin Media, for access to the same content. This bestows an unfair advantage on the YouView platform and, as noted below, in particular, its non-PSB shareholders who gain access to must have content for free when they otherwise would have to pay for it.

It is therefore critical that, as part of this review, the Trust explores in detail whether BT and TalkTalk are being granted preferential terms for certain content from PSBs by virtue of their involvement in YouView. The BBC Trust should scrutinise the agreements (or use a third party to do so) which have been entered into by BT and TalkTalk with each of the PSBs and understand whether they are being granted any form of exclusivity (or similar terms) which provides privileged access to any content and/or whether they are paying fair market rates for such content. In particular, [REDACTED], Virgin Media questions whether, at the same time, BT and TalkTalk are receiving that content at advantageous cost or even free of charge by virtue of their involvement in YouView. If this is the case, then there is a distortion in the market between pay-TV operators.

The BBC Trust must also consider whether there are any arrangements or agreements between YouView partners which seek to exclude or in any way disadvantage third party TV platforms by denying access to particular content or providing such content on uneconomic terms or with limited technical features that would materially reduce the ability of such third party platforms to compete and to develop future VOD services. As noted above, Virgin Media is concerned that the level of investment that has been made by the BBC and other commercial PSBs has, in effect, subsidised the creation of a commercial pay-TV platform operated by BT and TalkTalk given that 90% of all YouView set-top boxes are provided by BT and TalkTalk rather than through third party retail outlets. In this regard, Virgin Media believes that the BBC Trust should seek to limit any further financial contributions being made by the BBC to the venture so as to ensure there is no further use of the licence fee payers’ monies to prop up what has now become a commercial pay-TV platform.

Virgin Media is also concerned about the possible impact on innovation. If the YouView partners’ have the incentive to favour their own platform, they are in turn less likely to allow third party access to certain content/rights on an equivalent basis before such content/rights can be fully exploited on the YouView platform. Given that the YouView venture was initially designed as a means to promote innovation, any such restriction would undermine the fundamental principles underpinning YouView and has the potential to distort the market with competing platforms unable to compete as effectively as they may otherwise do with access to such content/rights. In particular, the BBC Trust should scrutinise YouView’s roadmap to consider whether there are elements of that (for example multi-screen) which may have the effect of stifling innovation where these rights may not be granted to pay-TV platforms (or granted at a higher cost).

As noted above, the YouView venture has already significantly deviated from the original proposals subject to the Approval. Should there be any contemplation of further changes to the operation or functionality of the YouView platform, in particular, if there are plans to move away from a set-top box (specified in the Approval) onto other consumer devices or to the Cloud, Virgin Media expects the BBC Trust to conduct a further in-depth market impact assessment in order to ensure that such future developments are subject to necessary levels of scrutiny and the effects on the wider market are fully taken into account.

Cross promotion

Trust’s Question: Is the BBC’s cross promotional code working effectively in relation to YouView?

Virgin Media remains concerned that given the identity and combined market position of the YouView partners, and the unique ability of the YouView PSBs (and the BBC in particular) to influence consumers' technology choices, together with the venture's enormous marketing power and the opportunity for cross promotion by the YouView PSBs, YouView has the potential to distort competition with other platforms. The BBC therefore needs to remain vigilant and continue to uphold the standards set out in its Cross Promotional Code. It is essential that the BBC continues to be held accountable and that there is equal treatment in relation to all TV platforms.

Virgin Media considers that the BBC’s Cross Promotional Code should be applied in an equally rigorous manner to YouView given its potential to negatively impact the market.

State Aid

As the Trust will be aware, one of the conditions of the Approval was that the funding arrangements for the venture should be compliant with state aid and competition law. In this regard, the BBC Trust stipulated that the BBC’s participation in YouView should not lead to the provision of any form of subsidy to the venture partners. The Trust therefore instructed the venture to reimburse the BBC in respect of all of its expenditure made prior to October 2009 either through the purchase (at market value) of all assets which had been purchased using BBC contributions or the repayment of unused funds. Furthermore, the BBC Trust stated that any potential frontloading of BBC contributions on behalf of YouView joint venture partners must be in line with the market economy investor principle (“MEIP”).

Based on information available in the public domain, it is unclear whether this condition has been satisfied. As such, it is incumbent on the BBC Trust to conduct a review of the payment flows to ensure that the BBC has been reimbursed for all monies contributed to the YouView project prior to October 2009 (as required by the Approval) and that any frontloading of costs complies with MEIP. The results of this analysis should be made public to ensure full transparency and accountability and, if it is established that a greater amount has been contributed that originally envisaged, repayment should be expedited.

Virgin Media would also refer to the point made above in relation to any further financial contributions being made by the BBC to the venture which will, in effect, support a commercial pay-TV platform.

In addition, the Trust may wish to consider the BBC’s financial contributions to the further funding of YouView marketing in light of the competing marketing by Freeview to which the BBC is also a contributor.

Virgin Media October 2013