BBC Trust in Its Analysis of Market Impact

Canvas: Annexes for proposition 1 Contents page Annex 1 – Nature of costs.............................................................................................................. 3 Annex 2 – Cost recovery................................................................................................................ 4 Annex 3 – Key drivers of distribution costs and details of assumptions......................................... 5 Annex 4 – Possible Merger Control, Competition Law and State Aid Issues................................. 9 Annex 5 – Rights implications: the delivery of BBC linear & on demand services via IPTV ........ 19 Annex 6 – Current position with Freeview Board ......................................................................... 22 Annex 7 – Preliminary Market Impact Assessment...................................................................... 26 Annex 8 – Canvas and the UK ISP community............................................................................ 82 Annex 9 – Venture Structure for Canvas ..................................................................................... 84 2 Annex 1 – Nature of costs The costs can be split into three broad areas with different characteristics: a) Platform technology These costs are specific to Canvas and include: Specification and development of a set top box Integration of software and construction of a testing regime Conceptual development, design and production of a user interface The majority of product and technology costs would be incurred prior to launch although there would also be a low level of ongoing operational costs. Both upfront and ongoing costs would be shared with venture partners. The majority of costs associated with Canvas are man hours, some of which would be in the form of redeployment of existing people and the project requires a significant commitment from the BBC’s Research and Innovation team. Canvas would also require ‘technology’ partners to develop the software and ‘device’ partners to manufacture the box. These partners would take on significant costs on behalf of the venture which are not stated here. b) Marketing and Operations Any marketing and operations costs would be divided between venture partners. The launch cost and annual costs are highly dependent on the launch scenario. These figures also include marketing support for High Definition (HD) on DTT (not currently budgeted). These costs have been based on existing investment in Freeview and Freesat| |||||||||| ||||||| ||||| ||||||||||||||||| |||||||| |||| ||||||||||||||||||| ||||| ||||||||||||||||| |||| |||||||||||| |||| |||||| |||||||| |||||| |||||| ||||||||||||||| ||||||||||||||| ||| |||||||||||||| ||||||| |||| ||||||||||||||||| |||| |||||||||||||||| |||||||||||| c) Distribution via IP These costs arise from the distribution of content from BBC servers to ISP networks. These costs do not include any cost that the ISP incurs from distributing content from their network to the home. This is a BBC only cost. It is currently a variable cost and is dependent on the success of the platform, the unit cost per gigabyte and the nature of the content offer. The figures reflect mitigation provided by technology solutions such as push video on demand and assume that all existing DTT broadcast services continue to be by those technologies. These assumptions have reduced proposed costs to the BBC significantly. However it is very difficult to estimate the unit cost of IP distribution as the market is changing rapidly, prices are dynamic and technology advancements are likely. d) Other costs and revenues The costs shown here do not include the costs for the BBC in terms of reversioning content for the TV screen or investing in content that makes the most of the new environment, and does not include potential rights costs (expected to be minimal but highly dependent on the exact approach taken). In addition, the cost of a data analytics engine has not been included in our modelling. A data analytics engine would allow the BBC to offer personalised recommendations and our commercial partners to offer targeted advertising. This workstream is expected to be cost neutral within the first five years. 3 Annex 2 – Cost recovery There is potential for the BBC to regain some of its expenditure through a cost recovery model similar to that of Freesat. The ambition is to charge those content providers that provide content through the broadband path for an EPG listing position and exposure to the full technical features that Canvas would provide. Hence this is net of forecast income from Freesat (estimated at circa £||||||||| pa). Looking forward over the next few years, we estimate that a realistic cost recovery model could generate |||||||||||| |||||||| |||||| |||||||||||| ||||| |||||| ||||||||||||| (this would be split by the number of partners in the venture). Table 5 below demonstrates how this may look. Table 5 2010/11 2011/12 2012/13 Number of broadband content ||||| ||||| ||||| providers (with listings) EPG/ Partnership fee |||||||||||||| |||||||||||||| |||||||||||||| Total p.a. |||||||||||||||||||| |||||||||||||||||||| |||||||||||||||||||| These figures are indicative. 4 Annex 3 – Key drivers of distribution costs and details of assumptions Internet distribution costs are variable, driven by the volume of consumption and unit pricing that applies at the time. Errors in the forecast of either of these impact directly the cost to the BBC. For this reason, all costs here are illustrative only. Unit costs Distribution costs for A/V media over the internet are currently charged as £/GB (a GB is approximately 30 minutes of PC iPlayer video, or 10 minutes of Canvas video). Distribution costs have fallen consistently in recent history due to a number of factors: 1. Global growth has driven economies of scale, and continues to do so 2. Moore’s Law continues to drive down unit costs of the hardware and storage components of distribution systems 3. Competition has increased, with the number of large scale suppliers increasing with directly competing products 4. The BBC’s distribution volume and industry profile have both increased substantially, driving significant unit price reductions As a consequence, over the space of the last 12 months, the BBC’s unit pricing for internet streaming ||||||| |||||||||||||| ||||||||||||||||||||| and the cheapest supplier is now offering unit pricing at |||||||| ||| |||||| ||||||||| of a year ago. On the other hand, although the costs of servers, storage and networks continue to fall, the infrastructure on which they depend (data centres, power, cooling) are all seeing prices increasing. For example, ||||||||||| ||||||||| ||| |||||| ||||||||||| ||||||||| ||||||||||||| |||||||| ||||||||||| ||||||||| ||||||||||||||||| |||| |||||||| |||||||| |||||| |||||| ||||| |||||||||||||| However, it costs ISPs more to distribute content to their users than it costs the BBC to deliver it to the ISPs’ networks. As a result, a number of ISPs (in particular Virgin, Sky, and BT Wholesale) are planning to develop their own systems for the delivery of video optimised for their networks, and some of these are expected to be operational within the next 18 months. This would result in new business models being developed for internet distribution, which adds further uncertainty to the unit pricing that will apply at the point that Canvas launches. Distribution costs and assumptions Canvas will be launched in the context of increasing IP connected television platforms. Canvas may have an impact on the costs of distributing to those platforms because it may affect their take-up once it has launched. Scenario 1: No Canvas, other IP connected television platforms launch In scenario 1 Canvas does not exist and the BBC would pay the costs to distribute content to reach users of other IP enabled TV platforms. This is described as the counterfactual in the Market Impact Assessment. Independent market modelling has shown that the number of IP connected boxes offering video services is likely to increase regardless of whether Canvas is launched. This means the BBC would have a distribution cost even if Canvas did not launch. Scenario 1: Without Canvas (£m) 2010/11 2011/12 2012/13 Syndicating to TV platforms in world |||||| |||||| |||||| without Canvas1 Scenario 2: Canvas launches, other IP connected television platforms launch Scenario 2 presents the costs in a scenario in which a strong Canvas proposition is launched and has an impact on the market in which other IP enabled platforms exist. For example, one impact of Canvas might 1 This includes an estimate of connected Sky DTT and DSat boxes, TUTV, Freeview+ and BT Vision in a scenario in which Canvas is not launched; the costs for syndication have been calculated using the same product assumptions, such as quality, PVR and push VoD usage and BBC share as the specific Canvas costs 5 be to slightly reduce the amount of other IP enabled boxes used by providing a free to air alternative. In this case the costs for syndicating occur alongside the costs for distribution to Canvas boxes. This is described as the factual in the Market Impact Assessment. Scenario 2: With Canvas (£m) 2010/11 2011/12 2012/13 Syndicating to TV platforms in world |||||| |||||| |||||| with Canvas2 Marginal cost of Canvas |||||| |||||| |||||| Total cost of syndicating and |||||| |||||| |||||||| Canvas Scenario 1 compared to Scenario 2 In the scenario in which Canvas is launched the number of viewers using non-Canvas platforms declines. Therefore, scenario

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