BT's Response to Ofcom's Review of the Pay TV Wholesale Must-Offer Obligation
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BT’s Response to Ofcom’s review of the pay TV wholesale must-offer obligation 27 February 2015 NON-CONFIDENTIAL VERSION TABLE OF CONTENTS 1. EXECUTIVE SUMMARY AND INTRODUCTION ......................................................................... 4 2. THE NATURE AND SCOPE OF MARKET DEVELOPMENTS SINCE 2010 ........................................ 9 The market context for Ofcom’s WMO Review .................................................................................. 9 Ofcom mischaracterises developments with respect to live sports rights ownership since 2010 ... 15 Ofcom’s focus on the cost of sports rights is misplaced ................................................................... 33 Ofcom overstates the increase in the availability of Sky Sports since 2010 ..................................... 36 Ofcom overstates the importance of new ways to access content in addressing competition concerns ............................................................................................................................................ 42 3. OFCOM’S NARROW FOCUS ON PREMIER LEAGUE AND CHAMPIONS LEAGUE CONTENT WILL NOT CORRECTLY IDENTIFY UNDERLYING COMPETITION PROBLEMS ................................................ 44 Live sport is important for driving pay TV subscriptions .................................................................. 44 Ofcom’s focus on specific content instead of channels does not reflect the reality of consumers’ purchasing decisions and will not identify the sports channels and packages of sports channels that are necessary for fair and effective competition ...................................................................... 46 Access to the full Sky Sports proposition is necessary to ensure fair and effective competition .... 60 Ofcom’s analysis regarding the individual sporting events that it examines is incorrect even on its own terms ......................................................................................................................................... 79 4. SKY ENJOYS A STRONG MARKET POSITION ACROSS ALL PARTS OF THE VALUE CHAIN ............ 92 Sky’s market position in the wholesale supply of sports channels ................................................... 93 Sky has a strong retail position overall and particularly in respect of those retail subscribers who are willing to pay for premium sports content ................................................................................. 99 Sky has material incumbency advantages at the retail level .......................................................... 104 Sky has material advantages when bidding for live sports rights ................................................... 113 5. LIMITED DISTRIBUTION OF THE SKY SPORTS PROPOSITION WILL HAVE A MATERIAL EFFECT ON COMPETITION ..................................................................................................................................... 133 BT agrees with Ofcom’s views on the possible forms that limited distribution may take ............. 133 The limited distribution of the Sky Sports proposition has a material impact on fair and effective competition ..................................................................................................................................... 135 Limited distribution of BT Sport has no impact on fair and effective competition ........................ 142 6. SKY HAS AN INCENTIVE TO LIMIT THE DISTRIBUTION OF ITS SKY SPORTS PROPOSITION ..... 145 Sky has the ability to impede fair and effective competition through the limited distribution of its Sky Sports proposition .................................................................................................................... 145 Sky has a strong incentive to limit the emergence of fair and effective competition by limiting the distribution of its Sky Sports proposition ....................................................................................... 146 2 BT has neither the ability nor the incentive to limit the distribution of BT Sport .......................... 155 7. COMMERCIAL PREMISES MUST FORM PART OF THIS REVIEW ............................................ 160 Commercial supply cannot be divorced from the competition concerns in residential markets .. 160 An analysis of the commercial sector shows that for the majority of commercial premises, Sky acts independently of competitive pressures from BT Sport ................................................................. 161 Ofcom’s reasons for omitting the commercial sector from its review are not sound ................... 164 8. BT’S CONCLUSIONS AND VIEWS ON THE NEXT STEPS IN THIS REVIEW ................................... 167 BT agrees with Ofcom’s conclusions, though they are expressed more tentatively than the evidence warrants ........................................................................................................................... 167 Next steps: the scope of the remedy required: regulation of the full Sky Sports proposition ....... 169 Next steps: the form of the regulation required: wholesale access on specified terms ................ 173 Regulation of the Sky Sports proposition would be proportionate ................................................ 174 ANNEX 1: LEGAL AND ANALYTICAL FRAMEWORK ............................................................................ 176 The need for an orthodox analytical approach............................................................................... 176 The purpose of intervention under section 316 ............................................................................. 179 Objective evidence provides the best indicator that the limited distribution of Sky Sports has an effect on fair and effective competition ......................................................................................... 180 The timing of subsequent reviews .................................................................................................. 181 ANNEX 2: OFCOM’S CONSULTATION QUESTIONS ............................................................................ 183 ANNEX 3: INDEX OF SUPPORTING DATA ANNEXES .......................................................................... 186 3 1. EXECUTIVE SUMMARY AND INTRODUCTION 1.1. BT welcomes Ofcom’s review of the wholesale must-offer (WMO) obligation. The WMO Remedy was imposed in 2010 with the aim of facilitating the emergence of fair and effective competition in pay TV markets. Since that time, however, it is clear that fair and effective competition has not emerged: Sky’s position remains entrenched and competitive constraints upon it are, at best, weak. In particular: (i) despite the imposition of the WMO Remedy in 2010, Sky continues to be by far the largest operator at all levels of the pay TV value chain, with almost 11 million pay TV subscribers. Over the period, it has acquired an additional 1 million retail pay TV subscribers [] which gives it a retail revenue market share of 60% to 80% based on Ofcom’s own analysis, and its adjusted operating profit has increased from £855m in 2010 to £1,260m in 2014. Sky’s exceptionally low churn rate, is, today, the lowest it has been in a decade, and it has further consolidated and entrenched its overall market position in the pay TV sector with the development of NOW TV. (ii) Sky’s sports channels continue to remain an important driver of pay TV subscriptions, and underpin Sky’s strong market position across the value chain. Sky continues to hold the vast majority of live sports rights on pay TV, and has further consolidated its position since Ofcom’s investigation in 2010 with more live Premier League rights (in absolute and relative terms), the long-term renewal of most of the ‘second-tier’ rights that Ofcom identified in 2010 and the acquisition of new, important, second-tier rights such as F1 and the British Open golf championship. (iii) In addition, the importance of Sky Sports to pay TV subscription decisions has enabled Sky to maintain a packaging structure whereby Sky TV customers must ‘buy through’ a pack of basic channels in order to access the Sky Sports channels, which also contributes significantly to Sky’s overall pay TV revenues and profitability. (iv) As a result of stringent wholesale regulation in the broadband sector, distortions in the pay TV sector have now spilled over into adjacent markets, where Sky is able to use its supernormal profits in pay TV to heavily discount its broadband products. As a result, Sky is now the largest provider of “triple-play” (fixed line, broadband, pay TV) bundles, and has grown to be the UK’s second largest broadband retailer, with a retail market share of 23%.1 The rapid growth of Sky’s broadband position, to almost a quarter of the retail market (despite vigorous competition in retail broadband), contrasts sharply with BT’s limited ability to gain purchase in retail pay TV markets, 1 Sky’s market share of retail broadband by number of subscribers estimated by BT as at the end of December 2014 based on the data in Sky’s quarterly results. 4 and its acquisition of [] Sky Sports subscribers as a result of Ofcom’s WMO Remedy. 1.2. It is essential, therefore that Ofcom now uses this review to address effectively the enduring issues with Sky’s entrenched market position in order to ensure fair and effective competition in pay TV markets. 1.3. BT agrees that the focus of Ofcom’s review should be on live sport given its continued importance for driving pay TV subscriptions, and the desire