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Changes to BBC Iplayer: Competition Assessment

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Changes to BBC Iplayer: Competition Assessment CHANGES TO BBC IPLAYER Competition assessment April 2019 Clive Kenny [email protected] Frontier Economics Ltd is a member of the Frontier Economics network, which consists of two separate companies based in Europe (Frontier Economics Ltd) and Australia (Frontier Economics Pty Ltd). Both companies are independently owned, and legal commitments entered into by one company do not impose any obligations on the other company in the network. All views expressed in this document are the views of Frontier Economics Ltd. CHANGES TO BBC IPLAYER CONTENTS Executive Summary 5 1 Introduction 18 1.1 Structure of this report 18 2 Framework for assessing the impact of the BBC iPlayer changes on competition 20 2.1 Introduction 20 2.2 Regulatory framework to assess changes to the BBC’s services 20 2.3 Analytical framework for the assessment of crowding out 24 2.4 Analytical framework for the assessment of scope for harm to competition elsewhere in the supply chain 28 3 The competitive context for the proposed changes to BBC iPlayer 30 3.1 The audio-visual sector is characterised by constant innovation 30 3.2 VoD competes with linear broadcasters, as well as newer audio-visual suppliers 31 3.3 Technological advances have led to convergence between different forms of content 33 3.4 Entrant broadcasters have put pressure on broadcasters to compete and innovate 33 3.5 Conclusion on sector wide trends 35 4 Suppliers affected by the changes to BBC iPlayer 37 4.1 Introduction 37 4.2 The BBC iPlayer’s role in the TV value chain 37 4.3 Identifying suppliers affected horizontally by the changes 40 4.4 Identifying suppliers affected vertically by the changes 52 5 Horizontal assessment on competition 54 5.1 Introduction 54 5.2 Summary of the static impact on volumes 54 5.3 Static impacts on revenues and profit margins 57 5.4 Combinatorial impacts across all segments 71 5.5 Dynamic impacts 73 6 Vertical assessment of scope for adverse impacts on competition 78 6.1 Introduction 78 6.2 Do the changes affect the ability of BBC to foreclose competitors by restricting supply of essential inputs? 78 6.3 Do the changes affect the ability of upstream producers to finance and produce content? 85 6.4 Conclusion on vertical impacts 92 6.5 Consideration of interactions between vertical and horizontal impacts 92 Annex A Qualitative assessment of characteristics of, and preferences and attitudes for BBC iPlayer and potential substitutes 94 frontier economics CHANGES TO BBC IPLAYER Annex B Impact on sVoD subscriptions 111 Annex C Exploiting “secondary rights” for content 118 frontier economics CHANGES TO BBC IPLAYER EXECUTIVE SUMMARY The BBC plans to make changes to its BBC iPlayer service. The changes will enable it to keep pace with rapidly evolving consumer tastes driven by technological advances in the sector. These proposed changes will add content to BBC iPlayer and importantly allow licence fee payers to get access to an increased volume of content beyond the 30 day catch up window. The changes are designed to meet the growing expectations of consumers who use Video on Demand (VoD) platforms to access content and will mean that the BBC iPlayer service will match the range of content offered by its competitors. Ofcom has directed the BBC to undertake a Public Interest Test on the proposed changes to determine whether the changes lead to an adverse impact on fair and effective competition, and if so, whether any incremental public value created justifies any identified adverse impacts. This report considers the scope for the changes to lead to adverse impacts on competition. We use the following framework to assess the impact of changes to BBC iPlayer on competition in the audio-visual sector. We describe some of the competitive dynamics which provide the context for the proposed changes to BBC iPlayer. We describe the suppliers that are likely to be affected by the BBC iPlayer changes. It is likely that additional viewing of programmes on BBC iPlayer will come from a range of different sources including: cannibalising existing BBC viewing through both its linear and BBC iPlayer services; other Broadcaster VoD (“BVoD”) services including ITV Hub, All4, My5 as well as VoD offered within PayTV bundles1; other subscription VoD (“sVoD”) services such as Netflix, Amazon and NowTV; other linear TV; other types of audio-visual content (for example YouTube or gaming) whether watched on TV or on portable devices. We estimate the effect of horizontal static impacts (i.e. the reduction in viewing) on the revenues and profit margins of providers of rival services. For those suppliers where an appreciable static impact is plausible, we consider the dynamic impacts on substitutes for BBC iPlayer including: the impact on incentives to invest and innovate; and the potential for competitor responses. We consider whether there are vertical impacts. Specifically, we consider whether the changes to BBC iPlayer affect the ability or incentive of the BBC to engage in a vertical foreclosure strategy by limiting rivals’ access to inputs such as rights to “secondary” content. We also consider the impact of the changes on the incentives of producers to create content. 1 We distinguish the VoD services which are included within a Sky or Virgin standard PayTV service, from sVoD which is a standalone VoD service available on an Over The Top (OTT) application using broadband networks. frontier economics 5 CHANGES TO BBC IPLAYER Technological advances are driving innovation in this dynamic sector The audio-visual sector has seen dynamic change in recent years. Advances in device technology and broadband networks have changed how we consume audio-visual content. We are now able to access a wide range of content on our TV, and on a growing number of portable devices. While linear viewing has proved remarkably resilient (still accounting for 84.7%2 of TV viewing) there is a clear pattern of substitution from linear to VoD services. Broadcasters consider VoD services as complementary to their linear services. They help audiences to find content and can cross promote first run and older content. They are particularly important for attracting younger demographics. Lack of access to scarce spectrum or control over a TV distribution platform are no longer barriers to entry in the broadcasting sector. US-based broadcasters with large content budgets, who invest in data-driven, user-friendly VoD platforms, have been able to rapidly enter the sector and capture viewer share from existing linear broadcasters. New entrants with global media brands are expected to launch services in the coming years. The resulting competition clearly benefits consumers who have switched to these new services in significant numbers. At the same time, boundaries between different forms of audio-visual entertainment have been eroded. We watch all forms of content on our smart TVs, just as we watch TV on our phones, tablets and other mobile devices. This means that the competition for our screen time involves not just other TV broadcasters but other types of audio-visual content whether short form video from video sharing sites (YouTube), social networking or gaming. Furthermore, all commercially funded broadcasters must develop compelling digital offerings in order to face the challenges from uncertain TV advertising revenues. Not only is the volume of linear advertising declining as viewers migrate to VoD, YouTube and other forms of audio-visual entertainment, but advertising publishers have to compete in the digital space with the digital advertising giants such as Google and Facebook. In this context, the BBC needs to ensure that its BBC iPlayer service is on a par with competitors in order to remain relevant to its users. The proposed changes to BBC iPlayer are an intrinsic part of its strategy. There are a wide set of horizontal substitutes potentially affected by the BBC’s proposed changes to BBC iPlayer The audio-visual market is highly differentiated. Technological advances have enabled a degree of “convergence” across different forms of audio-visual content. On our TV set we watch a wide range of different types of content, all accessible at the push of a button via our remote control. At the same time, we increasingly 2 https://www.barb.co.uk/viewing-data/catch-up-and-live-tv-compared/ : (as of 28 Jan, 2019). Accessed on 14/2/2019 frontier economics 6 CHANGES TO BBC IPLAYER watch TV content on our portable devices, whether at home, on the move, or out and about. Conceptually, the analysis needs to identify the competitor set that BBC iPlayer competes with: where does incremental viewing to BBC iPlayer switch from as a result of the changes? In practice, given the differentiated market there are a wide set of potential substitutes with varying degrees of substitution for viewing of BBC iPlayer. Measuring the degree of substitution to BBC iPlayer An important part of the competition analysis is the assessment of the degree of substitution from competitors to BBC iPlayer. In a highly differentiated sector with heterogeneous consumers, measuring the relative degree of substitution is complex. There is no bright-line sector boundary which can define the set of products that are a substitute for BBC iPlayer, and those that are not. Instead there are a wide range of potential differentiated products which will be substitutes for BBC iPlayer to different degrees. In practice, the degree of substitution relates to two factors. First, it reflects the strength of substitution. This is the propensity of a consumer of a competitor service to substitute a minute of viewing of the competitor for BBC iPlayer. There are many factors that might influence the strength of substitution for different types of consumer.
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