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Name and title under which you would like this response to appear: Anonymous 201 Representing: Self What do you want to keep confidential?: None If you want part of your response kept confidential, which parts?: Not applicable Ofcom may publish a response summary: confirm that I have read the declaration: Yes Ofcom should only publish this response after the consultation has ended: You may publish my response upon on receipt Question 1:To what extent do you consider that DTT, DSat, cable and IPTV are in competition with one another for subscribers of pay TV services ? either at present or in the future?: Given the space limitations of DTT, irrespective of whoever operates the pay element, DTT is only ever likely to be a limited competitor. The provision of a full range of additional services and the real competition to attract viewers to turn them into subscribers is likely to be between DSat (), cable () and IPTV (British Telecom and Virgin Media). This is likely to remain so for the foreseeable future because the digital switchover process will not deliver greatly expanded broadcast space to DTT. Question 2:To what extent do you consider the Proposal is likely to deliver benefits to the consumer?: Ofcom’s duty is to promote competition, to protect the viewer and promote choice and variety at a reasonable cost to the viewer. This proposal would deliver no long term benefits whatsoever to the consumer for either -to-air or . In terms of the Freeview element of DTT, the loss of the Sky channels to a DTT pay system would be a significant and unacceptable loss of choice and variety. would be lost leaving only BBC News 24 as the sole dedicated Freeview news channel. The loss of News would mean the loss of the only free-to-air sports channel on Freeview. This channel shows a mixture of sports news and some live action and it would be a profound loss. One the surface, the Sky 3 entertainment channel would seem a lesser loss but it makes a unique contribution because it shows series like Nip/Tuck, Bones, etc. that only Sky has access to and it shows a range of documentary, arts and motoring programmes that are not available anywhere else on Freeview. Sky would also be able to buy any new channel leases that come up for sale and Sky could apply pressure to the existing channel holders to encourage them to join their new pay TV system, e.g. the UKTV Group's channels. This would start to significantly damage the attractiveness of Freeview and so threaten the digital switchover process. There will be little incentive to go digital if Freeview becomes a skeleton service sharing space with an overlarge Sky pay TV element. For these reasons this proposal should not be allowed. The proposal would also be detrimental to the consumers of pay television. This proposal, if granted, would make Sky even more powerful and it would control the access to pay services, the gatekeeper functions, on two platforms namely DTT and DSat. This would increase Sky's power significantly and that would be reflected in Sky having greater capability to acquire sole rights to programmes and series, to acquire the rights to premium sports events and films and to set the access rights conditions to the digital platforms under its control. This would be profoundly anticompetitive and would hinder the growth of major competitors like Virgin Media, British Telecom and Setanta and their capabilities to get attractive programming to compete with Sky. This consultation should also be seen against the wider media background of the Competition Commission's investigation into Sky's ITV stake (see Appendix 1) and the joint submission on the pay television market to Ofcom by Virgin Media, British Telecom and others (see Appendix 2). It is quite clear that even without these proposals, Sky is in an overstrong position and it is acting against the public interest by virtue of its existing operations and its recent 17.9% stake in ITV and that is according to the Competition Commission. To allow these proposals would only compound this problem. Similarly, the submission by Virgin Media, British Telecom and others shows, amongst other things, the poor behaviour by Sky in respect of supplying channels to Virgin Media, the provision of a high definition channel to Setanta and the acquisition of a large stake in ITV to block Virgin Media's tentative plans. To allow these proposals would only make the situations highlighted in the submission much worse. Question 3:To what extent do you consider that there is scope for sustainable competition in pay TV on the DTT platform and, more broadly, across all pay TV platforms?: There is no chance whatsoever of any sustainable competition in pay TV on DTT. Sky is several orders of magnitude larger than the existing pay television provider, Top Up TV and it would be a thoroughly unequal competition. The Top Up TV Anytime service and the Setanta 1 sports channel would not stand any chance against Sky's well funded marketing campaign. The only outcome would be a Sky victory leaving it in control of the pay systems on two digital media platforms and this is simply unacceptable. Furthermore, DTT is so limited in space that there is barely enough room for one pay TV provider let alone two fighting it out for dominance. Even after digital switchover, there will be precious little extra space and even that should be reserved for a free-to-air basic high definition service. The existing pay system operated by Top Up TV should be left alone to succeed or fail as market forces dictate. Pay television on DTT has a history of failure as the collapse of ITV Digital and the failure of the initial channel share offering of Top Up TV show. In the event of the failure of Top Up TV, Ofcom could allow another operator to start up using the existing boxes but that operator should not be either Sky, Virgin Media or British Telecom and that would promote competition. These three particular companies should not be allowed more than a 10% stake in any future DTT pay television provider so as to promote competition. The general prospects for pay television are better and the different platforms all have one different pay television provider - Sky on satellite, Virgin Media on cable, British Telecom on IPTV and Top Up TV on DTT. Ofcom should be looking at the wider picture and it should seek to promote competition for viewers between these different platforms and it should seek to remove any legislative, regulatory or physical barriers to competition between the different platforms and companies rather than promote unsustainable and pointless micro- competition within any one platform. For instance, British Telecom's Vision service depends on a Freeview which is only available to 75% or so of the British population so Ofcom should, with DigitalUK and others, facilitate the wider coverage of Freeview so that 98% of the population can access Freeview and so get the full BT Vision service thereby promoting competition. Similarly, Virgin Media can only reach about 55% of the population by cable but its own plans for an IPTV service should be facilitated, e.g. by ensuring fair and reasonable access to British Telecom facilities with Ofcom acting as the impartial adjudicator in any disputes. Ofcom should set itself targets so that, for example, by 2012 75% of the population should have easy access to any two of the three major pay television systems (Sky, Virgin Media, British Telecom) rising to 95% by 2017. Similarly, by 2012, 65% of the UK population should have easy access to all three major pay systems rising to 85% by 2017. That really would promote competition and viewer choice and provide strong competition for Sky. Question 4:What are likely to be the key aspects of competition between providers of retail pay TV services on the DTT platform? E.g. what is the role of premium sports and movies content?: As stated above in Question 3, it is a complete myth that there will be any meaningful competiton bteween providers of retail pay TV services on DTT. If this proposal is allowed then all that will happen is that Sky's commercial power will just ensure that Sky replaces the existing Top Up TV/Setanta alliance within a couple of months. Irrespective of whoever runs the pay element on DTT, the space on DTT is so limited that it will never be able to provide a full and comprehensive pay television premium sports, films and high definition service. If people want some extra films and a few premium sports then the existing Picture Box service from Top Up TV can provide that while Setanta supplies a few additional sports events. If a customer wanted a wide range of additional sports channels, modern box office films and high definition channels then they would have to migrate to one of the other platforms anyway. Furthermore, allowing Sky to run the DTT pay service has film and sports rights and pricing implications as mentioned elsewhere. This proposal would concentrate Sky's power and would squeeze out the ability of competitors to obtain additional rights as this proposal would make Sky even more powerful and monopolistic. Question 5:Do you consider that if Sky were to become the only provider of pay TV on the DTT platform it would be likely to have a significant detrimental effect on competition in the long term? How might this affect the development of other platforms for the delivery of pay TV services?: Yes, there would be a significant and adverse effect on pay television competition. This proposal would give Sky a monopoly in pay television on two digital media systems, DTT and DSat. Sky would also be the gatekeeper through which other programme providers have to go through in order to get their services broadcast and that situation is open to abuse and manipulation and there is more relevant information contained in Appendix 2. The matter of Sky increased power and the rights for programmes has already been covered in the answer to Question 2. Question 6:To what extent, if at all, do you consider that the Proposal would be likely to lead to any of the public policy concerns outlined at Section 4?: Please see the answers to Questions 2, 3 and 5. This proposal is anticompetitive because it will increase Sky's power and ultimately it is likely to lead to less choice, greater prices and inadequate and weakened competitors. In the future, if a consumer wanted premium content like good sports matches and films they will have no choice but to go to Sky. The creation of Virgin Media, the growth of Setanta and the arrival of BT Vision means that, at last, there is the start of some meaningful competition for Sky. This competition should be encouraged and not decimated as would happen with this proposal. Question 7:Specifically, to what extent do you consider that the Proposal would be likely to lead to consumer confusion?: It is certain that there will be a greater degree of public confusion. There is the existing confusion caused by the loose use of the terms Freeview and DTT, e.g. Setanta promoting their DTT pay services on "Freeview". Not only that, there are already two different types of DTT pay television boxes for sales, i.e. the DTT pay boxes for the channel and the DTT pay personal video recorders for Top Up TV's Anytime service. All this is on top of the many Freeview boxes and personal video recorders that are available. To add a third type of DTT pay television box with incompatible encryption and transmission systems would further add to the existing levels of confusion. This increased level of confusion will not help the digital switchover process and is not likely to aid the take up of digital . Question 8:To what extent do you consider that it is beneficial for consumers to be able to obtain Sky and existing DTT pay TV content without having to purchase separate STBs?: In a sense, this is a very hypothetical question and it is not likely to happen. Either Sky will get its way and be allowed to provide its Picnic service through the new and incompatible but secure DTT pay boxes or it will not supply its content through the existing pay TV infrastructure due to concerns over piracy. In that latter aspect, Sky does have valid concerns. The existing DTT pay services currently use a version of the insecure conditional access system from Kudelski (this replaced the previous system in 2007) which has been thoroughly compromised by the latest generation of advanced conditional access modules and cloned cards. Regrettably, this means it is all to easy to view premium content on DTT without paying and to put such content up on websites and share it with others via the BitTorrent file sharing system and other similar networks. Sky recognises that putting its own premium content on DTT with the existing encryption infrastructure will result in an enhanced piracy incentive. This is why Sky is insisting on using the NDS coding system in its boxes, why it is not allowing the use of conditional access modules for its Picnic service and it is why Sky will not use Nagravision on DTT. Question 9:Do you consider that the Proposal might lead to any additional public policy concerns: There are two additional policy concerns that are relevant. Firstly, this proposal would result in a diminished Freeview service with reduced channel choice and quality. Furthermore, the addition of yet another new and incompatible DTT pay box on the market will add to customer confusion about DTT. This could add to public scepticism and hinder the take up of DTT and the digital switchover process. This aspect should be taken into account by Ofcom when reaching its decision on this proposal. Secondly, there are also significant implications for Ofcom as a regulatory body if it allows this proposal. Ofcom's remit includes the promotion of competition and the protection of the public. To allow an overtly anticompetitive proposal such as this would raise the question of Ofcom's competence to make such decisions. In addition to adverse media publicity, Ofcom runs the great risk of facing a legal challenge, like a judicial review, because of the quality of its decision making. Ofcom is also highly likely to face an investigation from the House of Common Culture, Media and Sport Select Committee into its decision and that committee is also likely to delve into Ofcom's original decision to open up all DTT multiplexes to pay television as well. It would therefore seem prudent for Ofcom's senior executives to consider the wider aspects in this instance including the Competition Commission's full interim report on Sky's stake in ITV and the full Submission to Ofcom on the need for a market investigation into the pay TV industry by British plc, Setanta Sport Holdings Limited, Top Up TV Europe Limited, Virgin Media Limited which was made on 3 July 2007. If Ofcom wishes to save face then it can refer this whole matter to the Competition Commission because of the serious nature of the competition issue that have been raised by this consultation. Question 10:If Sky becoming the only provider of pay TV services on the DTT platform were likely to have a significant detrimental effect on competition, do you consider that it is possible to address this through a set of additional conditions and/or directions? If so, what form should those conditions/directions take?: Sky is in such a powerful and dominant position already that there are no conditions that would sufficiently constrain Sky and its monopolistic tendencies. Under no circumstances should this proposal be allowed. Even if the media and sports interests and subscriber numbers of Virgin, BT Vision, Setanta, British and Top Up TV were all added up they would still be dwarfed by Sky. In the interests of competition, public protection and consumer choice, Ofcom should resoundingly reject this proposal. Additional comments: Finally, I have some more additional comments in the form of two appendices and I would be grateful if Ofcom would reproduce this document in full including the appendices below:

Appendix 1 Executive Summary of the Competition Commission’s

Provisional Findings on the Sky Stake in ITV

1. On 24 May 2007 the Secretary of State for Trade and Industry, now the Secretary of State for Business, Enterprise and Regulatory Reform, referred the acquisition by British Sky Broadcasting plc (BSkyB) of 17.9 per cent of the shares in ITV plc (ITV) to the Competition Commission (CC) for investigation and report. The reference was made under section 45(2) of the Enterprise Act 2002 (the Act). This followed the Secretary of State’s intervention notice dated 26 February 2007 and the reports of the Office of Fair Trading (OFT) and the Office of Communications (Ofcom) to the Secretary of State of 27 April 2007 under sections 44 and 44A of the Act respectively. Following an extension to our timetable, we are required to report to the Secretary of State by 2 January 2008. This was the first reference to be made under Chapter 2 of Part 3 of the Act (Public Interest Cases).

2. The media sector includes film, radio and television production and broadcasting; aspects of telecommunications; advertising; publishing; and the retailing of audio- visual appliances and DVDs. The (CA 2003) established Ofcom as regulator and competition authority for the UK communications industries with responsibilities across television, radio, telecommunications and . We focused primarily on television, although we recognized the importance of the broader media sector, particularly in our discussion of plurality issues.

3. The industry is characterized by significant and rapid changes in technology and consumer demand. For many years, viewers received three terrestrial channels: BBC1, BBC2 and ITV. Channel Four Television () was launched in 1982 and Channel 5 Broadcasting Limited (Five) in 1997. Multi-channel television using satellite or cable technologies was introduced in the early 1980s, offering many more television channels to viewers. Traditionally television was broadcast using an analogue signal. However, digital technology started to be introduced in the late 1990s, using capacity more efficiently and facilitating better picture quality. DTV Services Limited’s (DTVSL’s) free-to-air (FTA) service, branded as Freeview, was relaunched in October 2002 and has since grown very rapidly. By the end of March 2007, there were 8.4 million digital terrestrial television (DTT)-only homes, around 8.0 million satellite subscription homes, and 3.1 million cable subscription homes. The analogue service is being phased out region by region across the UK between 2008 and 2012. Digitization is facilitating the convergence of the television, telecommunications and sectors, and leading to the development of a range of new services and delivery platforms including, for example, mobile television and high-definition television (HDTV).

4. There are two basic business models available to television broadcasters: FTA and pay-TV. The major analogue FTA television services are BBC1, BBC2, ITV1, Channel 4 and Five. DTT is available through a set-top box and carries around 40 FTA channels. Around 200 channels are available FTA to owners of BSkyB satellite dishes through the ‘ from Sky’ service. The BBC has also announced its intention, together with some commercial broadcasters including ITV, of launching a ‘Freesat’ service. Commercial broadcasters of FTA services rely primarily on advertising and sponsorship for their funding. 5. Pay-TV retailers include BSkyB, Virgin Media Inc (Virgin Media) and the newer entrants such as BT Vision, Tiscali SpA (Tiscali) and Top Up TV Ltd (Top Up TV). Pay-TV retailers typically offer alternative packages of ‘basic’ channels, with ‘premium’ channels (such as sports or movie channels) offered singly or in small packages, usually as an optional extra. Pay-TV is available on DTT, digital satellite (DSat), cable, and the newer platforms (broadband and mobile). Pay-TV retailers rely primarily on subscription fees for their funding; subscribers pay monthly fees to view encrypted channels.

6. Current service and technical developments include the offer of bundled services; video (VoD); HDTV; and a range of services including personal video recorders (PVRs). New distribution platforms include mobile television and broadband television (either in the form of Internet Protocol Television (IPTV) or television-over-the-Internet).

7. BSkyB is a leading broadcaster of sports, movies, entertainment and news. It was formed in 1990 from the merger of Sky Television plc and British Satellite Broadcasting Limited. BSkyB’s largest shareholder is News UK Nominees Ltd (ultimately owned by News Corporation) which owns 39.1 per cent of BSkyB.

8. BSkyB acquires programming to broadcast on its own channels and supplies channels on a wholesale basis to other broadcasters. It also retails channels (both its own and those of third parties) to subscribers. BSkyB currently makes three of its channels available FTA via the UK DTT platform as part of the branded Freeview offering and has a 20 per cent stake in DTVSL. BSkyB produces a limited amount of its own content. Around three-quarters of BSkyB’s revenue is derived from subscriptions. Advertising makes up a small proportion of its revenues.

9. ITV (and its predecessors) has been the UK’s largest commercial broadcaster for more than 50 years. ITV was created from the merger of plc Carlton) and (Granada) in February 2004 and is quoted on the Stock Exchange. It is a producer of content through ITV Productions and a broadcaster of FTA content. It also has a 40 per cent stake in Independent Television News Limited (ITN) and a 20 per cent stake in DTVSL. Around three-quarters of its revenue is derived from advertising.

10. On 17 November 2006 BSkyB announced that it had bought 696 million shares in ITV, amounting to 17.9 per cent of ITV’s issued share . BSkyB paid 135p per share, a total of ?940 million, for its stake. We formed the view that BSkyB, through its acquisition of a stake in ITV, was looking to preserve the possibility of participating in any future bid for ITV. We thought it unlikely that BSkyB would have chosen to invest in ITV purely as an investment vehicle.

11. We looked at whether BSkyB had acquired the ability materially to influence policy relevant to the behaviour of ITV in the marketplace. We took the policy of a company in this context to mean the management of its business, in particular in relation to its competitive conduct, including the strategic direction of a company and its ability to define and achieve medium-term objectives. In assessing whether BSkyB had acquired material influence as a result of the acquisition, we did not take account of the possibility of a BSkyB director being appointed to the ITV board, nor of BSkyB increasing its shareholding, subject to remaining within the 20 per cent limit imposed by the provisions of CA 2003.

12. We found that the size of BSkyB’s holding both in absolute and relative terms was such that on the basis of past voting patterns it would be likely to be able to block special resolutions proposed by ITV’s management. ITV’s future strategy, published on 12 September 2007, focused on a three- to five-year plan for content-led growth funded through gains in efficiency and the disposal of remaining non-core assets. Nevertheless, given the dynamic environment in which ITV operates, we found that the board might well find it necessary to make major investments requiring external funding over the next two to three years. BSkyB’s ability to block a special resolution could effectively rule out some of ITV’s strategic options by limiting ITV’s ability to raise funds. BSkyB’s importance and stature as an industry player, together with its position as the largest shareholder, would give additional weight to its views. This could encourage the board to accommodate BSkyB’s views to avoid conflict. We concluded that BSkyB had acquired material influence. The turnover test under section 23(1) of the Act was satisfied and we concluded that a relevant merger situation had been created.

Assessment of competitive effects

13. We concluded that, had the acquisition not occurred, we would expect ITV to remain independent. We therefore assessed the competitive effects of the acquisition against an independent ITV.

Audiovisual services

14. We concluded that at current prices, ITV and BSkyB operate within a UK market for all-TV which included both pay-TV and FTA services. The all-TV market was highly differentiated and dynamic and we conducted our analysis of the impact of the acquisition not only by assessing the impact on the whole market under current competitive conditions, but also by looking at possible future constraints in pay-TV.

15. We looked at the strength of the existing and future constraints on BSkyB in the market for all-TV, assessing the constraint from other pay-TV operators and from the FTA offer in the absence of the acquisition. We found that within pay-TV, services offered over cable and DSat platforms were close competitors. Although services offered over the IPTV platform provided a certain level of competitive constraint within an all-TV market, it was not clear to us that these players would be able to acquire significant market share within the next few years.

16. We found that FTA services posed a constraint to BSkyB’s offer and that the BBC and ITV were both key to the strength of the FTA offer. Channel 4 and Five also made a significant contribution. BSkyB’s business model relies on the ability to persuade consumers to pay for the content available in its packages, rather than opt for freely-available services. We concluded that, given the competitive constraint of the FTA offer on BSkyB’s services, and the importance of ITV within the FTA offer, BSkyB would have the incentive to influence ITV’s strategy in such a way as to minimize the constraint it offered to BSkyB. 17. We did not find that entry or expansion would be likely to constrain the parties and hence mitigate BSkyB’s incentive to influence ITV’s strategy.

18. We looked at the impact of the acquisition on current competitive constraints. We thought it likely that BSkyB would influence ITV’s strategy. We identified several examples of the ways in which this might happen: (a) BSkyB could seek to influence investment in content production and commissioning. Given its interests as a competitor and despite its interests as a shareholder, BSkyB would have the incentive to reduce ITV’s investment in content in order to reduce the competitive constraint of FTA on BSkyB. Further, ITV could seek to acquire rights to existing content (such as sports rights) in order to improve the quality of its offer. If ITV sought to raise additional finance to support such an acquisition, BSkyB would have an incentive to seek to disrupt this. (b) FTA broadcasters are likely to need to invest significantly to obtain additional spectrum from Ofcom to launch an HDTV offer. BSkyB would have an incentive to seek to influence ITV’s ability to raise funds to participate in any spectrum auction. (c) BSkyB could attempt to influence the course of any future transactions involving ITV to weaken the constraint that FTA services would otherwise provide. It might, for example, disrupt an acquisition of ITV that might otherwise strengthen ITV’s competitive position, or encourage the acquisition of ITV by another buyer who might act in BSkyB’s interests.

19. BSkyB might also be able to exercise indirect influence due to its industry knowledge and standing. BSkyB would have an incentive, for example, to disrupt the planned launch of ITV’s Freesat service with the BBC, particularly in relation to the broadcast of HD channels.

20. We concluded that, as a result of the acquisition, there was likely to be a substantial lessening of competition (SLC) arising from a loss of rivalry in the all-TV market between ITV and BSkyB. This may be expected to result in a reduction in quality, a reduction in innovation, or an increase in the price of audiovisual services within the all-TV market, compared with the levels that there would have been absent the acquisition.

21. We looked at the possible impact of the acquisition on future competitive constraints. We did not form an expectation that ITV would develop a pay-TV offer, or strengthen a competitor’s existing offer. We concluded that there was unlikely to be an SLC arising from a loss of potential rivalry from a pay-TV offer developed or strengthened by ITV.

Joint bidding for sports rights

22. The acquisition may lead to BSkyB influencing investment in ITV’s strategy in relation to sports rights (see paragraph 18(a)). We concluded that the acquisition was not likely to lead to an SLC arising from either a reduction in joint bidding between ITV and third parties, or from increased joint bidding between ITV and BSkyB for sports rights. Advertising

23. We concluded that the effects of the acquisition could be assessed within a UK market for television advertising.

24. Although third parties raised a number of concerns in this market, we did not believe that any of the mechanisms could be expected to result in an SLC. The Contracts Rights Renewal remedy (CRR) currently prevents ITV from raising prices for sales of advertising on ITV1, and we saw no evidence to suggest that the parties would have the power to raise prices for advertising on the remaining channels that they offer. We also found that the nature of the influence obtained by BSkyB as a result of the acquisition would be unlikely to facilitate the types of anti-competitive behaviour described by third parties.

National television news programme supply

25. We concluded that the effects of the acquisition could be assessed within a UK market for the wholesale provision of television news.

26. We looked at the impact of the acquisition on the wholesale supply of news programming resulting from the indirect link between BSkyB and ITN (in which ITV has a 40 per cent stake). Channel 4 appeared to be the most concerned about its future news provision, in part because of its high-quality specification for its news services.

27. We considered the potential mechanisms through which competition could be reduced between Sky News and ITN. We thought it unlikely that the ownership link between BSkyB and ITV would lead Sky News to compete less aggressively with ITN given the size of BSkyB’s stake, the non-strategic nature of wholesale news provision, the fact that no relevant contracts will come up for renewal before 2010 and the presence of countervailing incentives for both companies. Nor did we expect the acquisition to increase the likelihood of coordination between ITN and Sky News.

28. We concluded that the acquisition was unlikely to result in an SLC arising from a loss of rivalry in the wholesale provision of national television news.

Provisional conclusions on the SLC test

29. We therefore concluded that BSkyB’s acquisition of a 17.9 per cent stake in ITV was likely to result in an SLC arising from a loss of rivalry in the all-TV market between ITV and BSkyB.

Plurality

30. The media public interest consideration specified by the Secretary of State in the intervention notice dated 26 February 2007 and incorporated in our terms of reference was ‘the need, in relation to every different audience in the or in a particular area or locality of the United Kingdom, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience’. This public interest consideration is set out in section 58(2C)(a) of the Act.

31. We took plurality to refer to the range of information and views provided to different audiences. We thought that it was appropriate to distinguish between the range of information and views that are provided across separate independent media groups (external plurality) and the range that are provided within individual media groups (internal plurality).

32. We note that the regulations in relation to plurality and impartiality are distinct. Impartiality relates to the fair and balanced treatment of differing viewpoints in relation to particular news stories. Safeguarding plurality is also a way of ensuring that decisions about the relative importance of different news stories are made by a range of independent people and reflect diverse perspectives.

33. We looked qualitatively at sufficiency, and the change in plurality that arose as a result of the acquisition, in relation to both internal and external plurality. Our interpretation of sections 58A(4) and (5) of the Act allowed us to look at the actual degree of control acquired, rather than assuming that there had been a full merger between the media enterprises that had ceased to be distinct.

34. We believed that news and current affairs were the genres most closely connected with the formation of public opinion about issues of national significance and that national news was a reasonable indicator to use. We looked at both national television news and cross-media news (obtained via television, radio, newspapers, magazines and the Internet). We also looked at the diversity of behaviour within audiences—for example, variation in terms of location and socio-economic group. While the parties do not overlap in the provision of regional news, we considered whether the acquisition was likely to have a differential effect on news audiences in the regions or nations of the UK, including Scotland, Wales and .

35. We found that the regulatory framework, while relevant to plurality and, hence, the statutory public interest assessment, did not on its own ensure a sufficiency of plurality.

Existing levels of plurality

36. We looked at the existing levels of plurality for national television and cross-media news audiences absent the acquisition. We noted the following indicators of plurality: (a) While television news programming is available on a range of channels, the five main channel providers (BBC, ITV, BSkyB, Channel 4 and Five) account for at least 97.5 per cent of total television news viewing. The BBC is by some margin the most widely viewed channel provider for news, followed by ITV. (b) Television news programme supply is more concentrated still. There are three main providers of news programming, BBC, ITN and Sky News, providing news programming to all of the five main channel providers. (c) Looking across media, television is most likely to be regarded by people as their main source of news, with newspapers and radio considered to be the next most important sources. While the Internet is growing rapidly, people still largely rely on traditional sources of news and traditional news providers. (d) Content analysis of television news reveals less diversity than a simple tally of news providers might suggest.

37. We noted that ITV was a significant channel provider for television news and that BSkyB, whilst smaller, was still significant. ITV was the most widely-viewed alternative to the BBC, with BSkyB one of three smaller players in news provision (together with Channel 4 and Five). The parties’ links to related companies—in particular ITV’s links to ITN and BSkyB’s links to News International and News Corporation—further increased the potential significance of the acquisition in both television and cross-media news. In television news, existing regulatory mechanisms reduced the scope for influence over editorial decisions by owners of television channels which broadcast news. There were fewer regulatory restrictions on newspapers.

38. We looked at how the acquisition might affect plurality in terms of direct editorial influence or commercial influence. We noted that both BSkyB and ITV said that the editorial content of ITV news would be unlikely to be a matter of strategic importance. We found that there was a strong commitment to editorial independence across television which would lead to editors resisting any intervention from the board or from shareholders to set the news agenda. We also noted that there were a number of internal and regulatory constraints in the production of television news which were likely to limit any possible single minority shareholder influence on editorial decisions.

39. We came to the conclusion that there was insufficient evidence to suggest that the acquisition of a stake of this nature would give BSkyB or its parent companies the ability or incentive to exert editorial influence over ITV’s news output.

40. We thought it likely that ITV was able to exert commercial influence over ITN. We noted that ITN would provide ITV with news programming until 2012. ITV’s commercial influence over ITN could, in principle, extend beyond ITV’s news output. In particular, if ITN were unable to function as an effective independent supplier of news content in competition to Sky News, this could reduce the ability of other channels, such as Channel 4, to provide an independent news voice.

41. However, while we consider it likely that BSkyB would have an incentive to favour Sky News over ITN, it is not clear to us that the acquisition would significantly alter BSkyB’s ability to influence ITV to do so. We therefore concluded that the acquisition of a 17.9 per cent stake in ITV did not give BSkyB the ability to exert significant commercial influence over ITV’s news output or more widely over ITN.

Provisional conclusions on plurality

42. In our view, the regulatory mechanisms, combined with a strong culture of editorial independence within television news production, were likely to be effective in preventing BSkyB with its 17.9 per cent shareholding from prejudicing the quality and independence of ITV news.

43. We therefore concluded that, in light of the actual degree of influence that could be exerted by BSkyB over ITV, the acquisition was unlikely to have an adverse effect on the sufficiency of plurality. The acquisition may therefore not be expected to operate against the public interest, having regard only to the relevant public interest consideration, namely the need for a plurality of media ownership.

Provisional conclusions on the reference

44. Under section 47 of the Act, we are required to consider the possible impact of the acquisition on competition (the SLC) and, taking account only of the SLC and the media public interest consideration specified by the Secretary of State, to consider whether the acquisition operates, or may be expected to operate, against the public interest. We concluded that BSkyB’s acquisition of a 17.9 per cent stake in ITV may not be expected to operate against the public interest having regard to the media public interest consideration. However, we also concluded that it was likely to result in an SLC based on our assessment of the competitive effects of the acquisition. In these circumstances, we concluded that, overall, the acquisition may be expected to operate against the public interest.

Appendix 2

Executive Summary of the Submission to Ofcom on the need

for a market investigation into the pay TV industry by British Telecommunications plc, Setanta Sport Holdings Limited, Top Up TV Europe Limited, Virgin Media Limited (3 July 2007)

Executive Summary Introduction and summary 1 Competition in pay TV in the UK is not working effectively. There are a number of features of the pay TV industry which result in competition in the UK being prevented, restricted or distorted. Absent regulatory intervention to address these features, the ‘vicious circle’ which leads to reduced competition and therefore higher prices, reduced choice and diminished innovation, will continue to prevail. 2 Each of the Parties to this Submission – BT, Setanta, TUTV and Virgin Media – has its own concerns about how such market failure manifests itself in practice and its own experiences of the specific adverse effects on competition that arise from the existing market conditions and Sky’s ability to exploit those conditions. Examples are described in the Confidential Annexes to this Submission. 3 Sky’s incentives and ability to leverage the existing market structure mean that any competition or other regulatory remedy aimed at addressing one or other aspect of its conduct will not prevent Sky from exploiting that structure in other ways. Accordingly, this market failure cannot adequately be addressed by piecemeal regulatory intervention (in particular, on the basis of the Competition Act), aimed at addressing individual manifestations of market failure. 4 Indeed, previous attempts by competition authorities to address competition problems present in the UK pay TV industry and in particular to regulate individual instances of Sky’s conduct have proved inadequate to deal with the structural features which allow such conduct to occur and the industry-wide market failure which results. 5 As a consequence, the Parties to this Submission consider that the full investigation of the UK pay TV industry which Ofcom announced on 20 March 2007 is thoroughly warranted. In the event that appropriate undertakings are not offered and accepted to address the market failure, the Parties would urge Ofcom to exercise its discretion under section 131 of the Enterprise Act 2002 to refer the UK pay TV industry to the Competition Commission for a market investigation. The UK pay TV industry 6 As established in previous cases, the pay TV supply chain can be divided into three main tiers: (i) the acquisition of content, (ii) the wholesale supply of channels and (iii) the distribution of those channels by platforms/retailers. Among other things, Sky has leading market positions at each of these three tiers of the supply chain in respect of sports and movie content and channels which are widely acknowledged to be the drivers of pay TV. For example: (a) Sky holds approximately 80% (by value) of the sports rights which are broadcast on a pay TV basis in the UK; (b) Sky has a 100% share of premium subscription movie rights; (c) Sky’s share of the wholesale supply of sports channels is approximately 96% (by revenue); (d) Sky’s share of the wholesale supply of premium subscription movie channels is 100%; and (e) Sky accounts for approximately 86% of the retail subscribers to premium sports and movie channels in the UK. 7 These leading market positions have endured over a prolonged period due to the existence of the vicious circle. Features of pay TV in the UK 8 At each of its three main tiers, the pay TV industry exhibits significant barriers to successful market entry, which are due in large part to the following distinctive features: (a) A finite pool of key content: in previous investigations, the UK and EU competition authorities have consistently identified high quality sports and movies as being key content for entry into and competition in pay TV and, in particular, the provision of premium pay TV services. The pool of rights for live broadcasting of the most popular sports events and the pool of rights for broadcasting (on a subscription basis) the movies produced by Hollywood studios are, however, necessarily finite. (b) The limited duration of certain contracts for key content: not only is the pool of rights to key content finite but the rights to broadcast certain key content are, themselves, often limited in duration. For example, some of the most valuable rights (such as live rights to the FA ) expire after just three years. This means that (i) an acquiring firm has a strictly limited time period in which to make a return on its content investments and (ii) a firm with an established subscriber base downstream enjoys a competitive advantage when bidding for content as it can monetise its investments in content faster than firms without such a subscriber base. This allows the former to outbid the latter for future key content, thereby perpetuating its leadership downstream. (c) Staggered availability of key content: content rights are also staggered in their availability, which significantly increases the barrier to entry. For example, in order to acquire a material subscriber base, a sports channel will need to offer regular coverage of attractive sporting events. Since contracts for key sports rights are staggered with several years between the sales of those rights, current holders of key content possess an advantage when bidding for additional rights. (d) The exclusive licensing and selective distribution of key content: pay TV broadcasters package content into channels which are then wholesaled to downstream distributors. The exclusive licensing of key content denies that content to competing broadcasters. The selective distribution of that key content (e.g. the refusal to wholesale channels to certain pay TV retailers) inhibits downstream competition. (e) Economies of scale in the distribution of content: pay TV broadcasters and retailers enjoy significant economies of scale. A larger subscriber base enables a broadcaster to reduce its average content acquisition costs and this downstream advantage provides it with an ability to outbid its rivals in the competition for key content. (f) Feedback effects: the pay TV industry is also characterised by significant feedback effects along its vertical supply chain. Pay TV broadcasters and retailers need to be able to offer attractive content to retain existing subscribers and to win new ones. But, as outlined above, the contest for content, especially for exclusive rights to key content, will most likely be won by channel providers with larger downstream subscriber bases. The selective distribution of that exclusive content enables them to enlarge their subscriber bases further, which in turn will bias the contest for content even more. The core issue: a vicious circle in pay TV in the UK 9 The combination of the six features outlined above distinguishes the pay TV industry from other industries with “feedback effects”. Pay TV’s market structure and these distinctive features give rise to two factors which demonstrate a clear cut need for regulatory intervention: (a) The pay TV industry exhibits a tendency for concentration and “increasing dominance” (i.e. leading market positions become entrenched). A firm with access to superior content is able to build a customer base advantage which consolidates its ability to monopolise the acquisition of content and, in turn, achieve a leading position downstream. (b) Market forces are unable to offset this tendency. Leading market positions become entrenched because consumers will not subscribe (or switch) to new entrants unless their content offerings are sufficiently attractive. But this is not likely because new entrants will face the handicap of having to compete for subscribers with inferior content and to compete for content with fewer subscribers. 10 Applied to pay TV in the UK, these features result in market failure. Sky holds the leading market positions at the key levels of the supply chain and, in particular, controls the most attractive pay TV content, the largest pay TV platform and the largest base of pay TV subscribers. Sky’s control of these mutually reinforcing upstream and downstream bottlenecks results in a vicious circle for its competitors.

Selective distribution of key content restricts competition from other pay TV retailers and drives the growth of Sky’s satellite subscriber base. Sky’s control of the biggest base of pay TV subscribers and the largest pay TV platform inhibits competitive bids from third parties for key content. Sky holds the rights to key content and either refuses to supply it to competing pay TV retailers or offers it on uneconomic terms

11 Against this market background, Sky is able to ensure that its leading position in the acquisition of content upstream is perpetuated by preserving its downstream advantage in pay TV distribution. Sky’s past conduct vis à vis its competitors confirms that Sky has both the incentive and the ability to foreclose downstream competition. For example, Sky is able to use its leading position in the acquisition of content upstream to deny key content to competing pay TV retailers and thereby restrict downstream competition for its own retail business. By refusing to provide third party pay TV retailers with access to its premium channels on economically viable terms and on a non-discriminatory basis as compared with its own downstream distribution arm, Sky can place its downstream competitors at a significant disadvantage which adversely impacts on the prices and choices available to consumers. 12 Sky is also able to ensure that its leading position downstream in pay TV distribution is perpetuated by preserving its upstream advantage in the acquisition of content. Sky’s past conduct vis à vis its competitors confirms that Sky has both the incentive and the ability to foreclose upstream competition. For example, Sky is able to use its leading positions downstream in pay TV distribution to inhibit access to the largest pay TV platform and the largest base of pay TV subscribers in the UK and thereby inhibit competitive bids for the most attractive pay TV content. 13 Sky is also now seeking to reinforce the effects of the vicious circle outlined above by extending it into new distribution platforms and technologies. For example, Sky imposes onerous obligations, including most favoured nation clauses, on third party broadcasters in its agreements with them for satellite distribution of their channels. These MFN clauses result in either restricted access to content for competitors seeking to use new platforms and technologies or the imposition upon such competitors of commercial terms which are appropriate for more traditional linear broadcast services. Thus, these MFN clauses inhibit the development of innovative services over new platforms and technologies. 14 The vicious circle described above is in no way tempered by the fact that exclusive rights for some key content (such as FAPL rights and premium movies) is awarded on the basis of a competitive bidding or auction process. As described in recent independent economics papers for the Competition Commission and the OFT, the competition problems of bids and auctions are broadly the same as ‘ordinary’ markets. In other words, the fact that there is a ‘competition’ for the rights does not mean that there is a level playing field in this ‘competition’ – firms in Sky’s position will have an inherent advantage in the competition for the rights, as a result of the features described above, and Sky’s leading market positions will be perpetuated in the bidding or auction process. Consumer Harm 15 Evidence indicates that consumers are harmed by these adverse effects on competition in terms of higher prices, restricted choice and reduced innovation. For example, data published by Ofcom indicates that, on average, pay TV subscribers in the UK pay more than their counterparts in other European countries. 16 LECG has undertaken an econometric study which compares the average pay TV prices observed in the UK and fourteen other European countries and investigates whether the differences between these prices can be explained by benign factors such as country- specific differences , such as pay TV being of a higher quality in the UK or the UK having higher income per capita. LECG’s econometric study strongly indicates that, even when account is taken of these differences in demand, UK consumers have to endure substantially higher average prices for pay TV - on average 36% higher than the pay TV prices in the other European countries in the sample. 17 In light of this conclusion, LECG investigated whether the remaining price differences can be explained by certain observed differences in market structure. LECG’s analysis strongly suggests that a significant proportion of the price differences between the UK and the other European countries in the sample can be shown to result from the market structure in the UK. LECG’s analysis is, therefore, evidence in support of the proposition that UK consumers are harmed by the current lack of effective competition in pay TV in the UK. 18 Consumers in the UK also suffer as a result of less choice and diminished innovation. For example, Sky is inhibiting the take-up of HD services on competing platforms by refusing to supply its HD channels to those platforms. Sky is also inhibiting the development of competing HD services on the satellite platform by refusing to provide conditional access services for such channels. 19 Further examples of reduced choice and innovation are set out in the Confidential Annexes to this Submission. Remedies 20 The market investigation is necessary in order to address both the mutually reinforcing upstream and downstream bottlenecks and the conduct which is associated with the structural features of the market (as in the case of the recent referral by the OFT of airport services in the UK by BAA to the Competition Commission). For the reasons explained briefly above and in more detail in the Submission, intervention is needed at all levels of the supply chain in order to facilitate effective competition in pay TV in the UK. This should include fair, reasonable and non-discriminatory access by third party pay TV retailers to Sky’s premium channels on economically viable terms and appropriate remedies to address the adverse effects which Sky’s downstream advantages have on the contest for content. 21 Whilst such remedies would limit Sky’s ability to foreclose (or marginalise) competitors at the various levels of the supply chain, Sky’s incentives to do so would remain. Trying to regulate a company against the grain of its incentives will always be both costly and difficult. A solution to this problem could be to complement the remedies above by modifying Sky’s vertical structure through operationally separating its channel and distribution businesses. 22 Overall it is clear that remedies are available to the Competition Commission to address the features of the pay TV industry described above. These remedies can be implemented at a proportionate cost, particularly given the increase in consumer welfare which would result from the introduction and consolidation of effective competition in the UK pay TV industry. Conclusion 23 As Ofcom is aware, it has a discretion under the Enterprise Act to make a market investigation reference to the Competition Commission where it has "reasonable grounds to suspect" that any market feature prevents, restricts or distorts competition in the UK. 24 The Parties submit that the evidence of market failure in pay TV in the UK and the need for remedies to address the structure and distinctive features of pay TV is overwhelming. Accordingly, absent the offering and acceptance of adequate undertakings to address the market failure in a comprehensive manner, the Parties request Ofcom to refer the pay TV industry to the Competition Commission.