International In-house Counsel Journal Vol. 3, No. 12, Summer 2010, 1
Overview of Ofcom’s Recent Decision Requiring Sky to Wholesale its Premium Sports Channels to Competing Retail Operators in the UK
CIARAN WALKER Fomerly Senior Competition Counsel, BT, UK
Abstract On 31 March 2010, Ofcom, the UK communications regulator, issued a Statement, requiring BSkyB Limited („Sky‟) to wholesale certain of its premium sports channels to competing operators in the UK at wholesale terms and conditions, including price, regulated by Ofcom.
Ofcom‟s Statement, which follows an investigation of pay TV in the UK lasting over 3 years, raises complex and interesting legal and policy issues relating to the circumstances in which an undertaking, which has invested significant sums in developing highly-valued property (in this case, premium sports channels), should be required by law to make this property available to third parties on a wholesale basis. This article provides an overview of some of the main issues raised in Ofcom‟s investigation.
A. Introduction
On 31 March 2010, Ofcom issued three separate documents relating to pay TV services in the UK. The most significant of the three documents was Ofcom‟s Pay TV Statement1 (the “Pay TV Statement”). The Pay TV Statement sets out in considerable detail Ofcom‟s imposition of a new broadcasting licence condition on BSkyB Limited (“Sky”), requiring it to wholesale certain of its premium sports channels to competing operators at wholesale terms and conditions, including price, regulated by Ofcom2.
1 http://www.ofcom.org.uk/consult/condocs/third_paytv/statement/paytv_statement.pdf 2 The second of Ofcom‟s three pay TV documents was its “Statement on Sky‟s „Picnic‟ proposal” (http://www.ofcom.org.uk/consult/condocs/picnic/statement/picnicstatement.pdf ). This Statement concludes that Ofcom consents to Sky‟s application to replace the three free-to- air (“FTA”) Sky channels it currently distributes on digital terrestrial television (“DTT”) with five pay TV channels, subject to the above wholesaling remedy being in place. Also, Sky is not permitted to launch this „Picnic‟ proposal until it has concluded a wholesaling agreement with at least one third party retailer for the premium channels that Sky proposes to retail on DTT. The commercial implications of this Statement are unclear, as Sky shelved its „Picnic‟ plans in September 2008 (http://www.guardian.co.uk/media/2008/sep/12/bskyb.television). The third of Ofcom‟s three pay TV documents was “Competition issues in premium Pay TV movies” (http://www.ofcom.org.uk/consult/condocs/movies_reference/moviescondoc.pdf). This consultation document sets out Ofcom‟s proposal to refer two closely-related movie markets to the Competition Commission for a full market investigation under the Enterprise Act 2002: the market for the sale of upstream movie rights from the 6 major Hollywood studios in the first pay TV subscription window and the market for the wholesale supply of packages including certain premium movies channels. The consultation period ended on 15 May 2010 and Ofcom is currently considering its next steps.
International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Ciaran Walker
The Pay TV Statement raises important and interesting legal issues. Sky has publicly criticised Ofcom‟s “unprecedented and unwarranted intervention”. It applied to the Competition Appeal Tribunal (“CAT”) for interim relief, in particular the suspension of the wholesaling obligation pending the determination of its appeal. On 29 April 2010, the President of the CAT adopted an order which, although not suspending the wholesaling obligation, limited its scope. In particular, pending the outcome of the appeal process Sky is only required to wholesale to BT Plc, Virgin Media and Top-Up TV3. Apart from the Sky appeal of the Pay TV Statement, separate appeals against this decision have been brought by the Football Association Premier League (FAPL), Virgin Media and British Telecom (BT). The FAPL argue, in particular, that the legal basis of Ofcom‟s decision is flawed and that Ofcom‟s analysis of the appropriateness and proportionality of a wholesale must offer obligation is flawed – the FAPL is concerned about the impact of the Pay TV Statement on the value of the FAPL‟s media rights. Whilst Virgin Media and BT will benefit from Ofcom‟s decision, they argue in their separate appeals that Ofcom‟s decision should have included within the scope of the wholesale must offer obligation the Sky Sports 3 and 4 premium sports channels; also, they argue against aspects of Ofcom‟s approach to setting the wholesale price. The purpose of the present article is to provide an overview of the main legal issues that have arisen in this Pay TV market investigation process.
B. History of the investigation
Sky has a strong market position at the wholesale and retail levels in the UK in the supply of premium sports and movies channels. Sky‟s strong market position derives largely from its control over high-value sports and movies content. Thus, for example, Sky has consistently outbid its competitors to acquire most of the rights to broadcast live Premier League football in the UK – these are by far the most expensive sports rights in the UK. In accordance with undertakings given by the FA Premier League to the European Commission in 20064, no company could be awarded more than five of the available six packages of live FA Premier League football matches – Sky holds five of these packages for the 2010/11-2013/14 football seasons. For the 2006/7-2009/10 football seasons, Sky acquired four of the packages and the UK business of the company that acquired the other two packages, Setanta, went into administration in June 2009.5 Also, Sky has exclusive deals with each of the six major Hollywood studios for the distribution in the UK of movies in the first pay TV window. Sky wholesales its premium sports and movies channels to the cable companies (in essence, Virgin Media). These wholesale arrangements derive from undertakings given by Sky to the Director General of Fair Trading in 1996 to supply its channels to the cable companies on the basis of prices set out in a published rate card. Whilst these undertakings subsequently expired, Sky has continued to wholesale to the cable companies. In 2002, following a detailed investigation under the Competition Act 1998, the Office of Fair Trading reviewed the rate card prices and decided that Sky‟s wholesale and retail
3 http://www.catribunal.org.uk/files/1152IR_BSKYB_Order_29.04.10.pdf. Also, these three companies are obliged to pay into an escrow account, pending resolution of the full appeal, an amount equal to the difference between the wholesale price Ofcom requires Sky to charge and the (higher) rate card wholesale charges Sky had previously applied when wholesaling its premium channels to the cable companies. 4 http://ec.europa.eu/competition/antitrust/cases/decisions/38173/decision_en.pdf 5 http://news.bbc.co.uk/2/hi/8115360.stm Competition 3 pricing of its premium channels did not give rise to an abuse of a dominant position by Sky; in particular, Sky‟s pricing did not amount to a margin squeeze on the cable operators.
Sky has not wholesaled its premium channels to any operator other than the cable operators. In January 2007, four separate companies (BT, Setanta, Virgin Media and Top Up TV) lodged a joint submission with Ofcom regarding Pay TV in the UK. The joint submission argued that there were significant structural competition concerns with pay TV in the UK.
Ofcom duly commenced an investigation of pay TV. It issued its first pay TV consultation document in December 20076, its second in September 20087 and third in June 20098. This process culminated in its Pay TV Statement on 31 March 2010. In the event, Ofcom chose to rely on its ex ante sector-specific powers, under s316 Communications Act 2003, to impose a condition in Sky‟s broadcasting license, requiring it to wholesale certain of its premium sports channels to third parties. S316 enables Ofcom to insert into the broadcasting licence of any broadcaster any condition that “Ofcom consider appropriate for ensuring fair and effective competition in the provision of licensed [broadcast] services or of connected services.” Before deciding whether or not to exercise this power, however, Ofcom is required, under s317(2) Communications Act 2003 to consider whether “a more appropriate way of proceeding in relation to some or all of the matters in question would be under the Competition Act 1998”.
S316 has, to date, only been relied on in a very few, relatively uncontroversial, circumstances9. The use of s316 in the present case, by contrast, is being challenged in the appeals before the CAT.
Ofcom stated that its core concern with a competition law-based approach to the pay TV issues is that it is an ex post approach, involving the investigation of specific instances of anti-competitive conduct that would not have enabled Ofcom to impose a sufficiently comprehensive remedy, dealing with all potential issues relating to a wholesale supply obligation, on an ex ante basis.
Ofcom also appeared to consider that the abuse of dominance provisions under competition law could only be relied on where „equally efficient‟ undertakings were
6 http://www.ofcom.org.uk/consult/condocs/market_invest_paytv/pay_tv.pdf 7 http://www.ofcom.org.uk/consult/condocs/second_paytv/condoc.pdf 8 http://www.ofcom.org.uk/consult/condocs/third_paytv/paytv_condoc.pdf 9 Thus, for example, it provides the legal basis for Ofcom‟s 2004 industry Code on Electronic Programme Guides (http://www.ofcom.org.uk/consult/condocs/epg/statement_archived/statement.pdf ). This Code essentially requires Broadcasting Act licensees to provide Electronic Programme Guide services to broadcasters on fair, reasonable and non-discriminatory („FRND‟) terms. Similarly, Ofcom relied on s316 to adopt its Code on cross-promotions in 2006 (http://www.ofcom.org.uk/tv/ifi/codes/crosspromotioncode/crosspromotioncode.pdf. That Code adopts reasonably detailed rules specifically applying to the main terrestrial broadcasters (ITV, Channel 4, Five); they target the cross-promotion of retail digital services to analogue households. They require that promotions to analogue households of digital TV platforms and services treat all the major digital platforms and services in an equal and impartial manner.
4 Ciaran Walker being excluded, whereas its competition concerns and remedy, discussed below, specifically address promoting market entry by undertakings that may be less efficient than Sky because of their smaller scale.
C. The Pay TV Statement – competition concerns identified by Ofcom
Sky‟s market power In its Pay TV Statement, Ofcom concluded that Sky had market power at the wholesale and retail levels in the supply of “Core Premium Sports Channels” in the UK. Sky‟s market power derived, in particular, from its control of key sports content rights. Ofcom identified the “Core Premium Sports Channels” in the UK as Sky Sports 1, Sky Sports 2 and ESPN (a non-Sky channel). These channels were dedicated sports channels, which contained a distinctively large amount of the most attractive live sports events shown regularly through the year –the most important of these live sports is Premier League football. Also, “even if we were to include sports broadcasting on free-to-air as well as Pay TV, Sky‟s market share would still be above 60%.”10
Sky‟s market power in the supply of these channels was not, as such, a competition problem. Also, Ofcom was “particularly mindful of the benefits that Sky has historically delivered to consumers, both through investment and innovation on its own platform, and its willingness to make long-term investments in UK sport”.11
The competition issue
Ofcom‟s competition concern, in broad terms, related to the future development of the digital terrestrial television (“DTT”) distribution technology and on-demand technologies such as Internet protocol television (“IPTV”). Absent adequate access to high quality sports content, there was a risk that these new and important TV distribution technologies would be undermined:
“Pay TV services have to date been delivered primarily via satellite and cable networks. However, this investigation comes at a time of disruptive change in the way content is distributed. For example, digital terrestrial TV offers the scope for pay TV to be delivered via aerials, and new broadband networks could offer consumers an unprecedented choice of content, and the ability to access that content on demand. The ability to provide such services depends not just on technology, but on access to content that consumers want to watch. Live high-quality sports and recent Hollywood movies retain an enduring appeal for many consumers. Access to this content has driven the historical development of pay TV, and we believe it will remain crucially important for the development of new platforms and services.”12
Furthermore, Ofcom noted that Sky had failed to wholesale its premium sports and movies channels to any third party operator other than cable operators (essentially, Virgin Media). Sky had been in negotiations with various third parties over a number of years
10 Pay TV Statement, para. 1.22. 11 Pay TV Statement, para. 1.11. 12 Pay TV Statement, paras. 1.3-1.4. Competition 5 for the wholesaling of the Sky premium channels, but none of the negotiations had concluded successfully.
Sky did retail its premium channels to a third party (Tiscali TV/Talk Talk TV) and appeared to be willing to retail its channels to other third parties. Ofcom accepted that “there are almost certainly legitimate arguments” for Sky‟s preference to retail its channels13, in particular efficiency benefits.
Ofcom nevertheless concluded that the retailing by Sky of its premium channels to competing retail operators, as opposed to the wholesaling of these channels, would not have adequately addressed Ofcom‟s competition concerns – in particular, Sky would not have retailed its channels on other platforms in a manner that would have competed with and thereby undermined its retail satellite service. Also, most competing retailers were unwilling to allow Sky retail on their platforms, as they would have had to give Sky access to their respective customer bases in order for Sky to retail to them.
Furthermore, Ofcom essentially blamed Sky for the failure of the commercial negotiations: “Even if Sky‟s preference for retail supply over wholesale supply can be justified by legitimate commercial considerations, we consider that Sky‟s actions indicate that it has a preference for no supply to third party retailers rather than wholesale supply.”14
As to Sky‟s wholesale arrangements with the cable companies, which derive from undertakings given by Sky to the Director General of Fair Trading in 1996 to supply its channels to the cable companies on the basis of prices set out in a published rate card, Sky argued that it had offered to wholesale to third parties on the basis of these rate card prices. Ofcom concluded, however, that Sky should have been prepared to offer wholesale prices that were lower than these rate card prices to new entrants, as the rate card prices were unsustainable for new entrants. As to the concern about Sky, as a dominant operator, discriminating in favour of new entrants in its pricing, Ofcom recognised that this could give rise to a competition issue for Sky. Ofcom concluded, however:
“Even if discounting the rate card to new wholesale customers meant that Sky would have to extend the same discount to cable firms, we would expect a standalone broadcaster to weigh the loss of revenues from a price cut to cable against the additional revenues from being present on a new platform. Our impact assessment indicates that on a static analysis Sky could increase its revenues by discounting its rate-card and wholesaling to more platforms. However, Sky does not appear to have considered this option in its negotiations with independent retailers.”15
In sum, Ofcom concluded that:
“This evidence of non-supply, together with Sky‟s market power and its vertical integration, suggests that Sky is acting on a strategic incentive to restrict supply, in order to favour its own satellite platform as well as protect its position when bidding for key content rights in the upstream market. The operation of fair and
13 Pay TV Statement, para. 7.102. 14 Pay TV Statement, para. 7.77. 15 Pay TV Statement, para. 7.128. 6 Ciaran Walker
effective competition is prejudiced both by the absence of wholesale supply to new competitors and by the terms of supply to Virgin Media. The results are a distortion of platform choice and reduced innovation.”16
D. The wholesaling remedy
Ofcom has imposed the wholesaling obligation on Sky by way of the insertion in its broadcasting licence of a new licence condition, setting out the terms on which Sky will be required to wholesale certain of its premium sports channels to third parties.
The wholesaling obligation applies to Sky Sports 1 and Sky Sports 2. It applies to both the standard and high definition versions of these channels. With regard to the possible risk that Sky might seek to „game‟ the remedy by moving some of its key sports content to other Sky channels that are not covered by the remedy (such as Sky Sports 3 or Sky Sports 4), Ofcom noted:
“If Sky acts in such a way that the only means of addressing the risk of gaming is by extending the obligation to Sky Sports 3 and Sky Sports 4, then we will consider doing so.”17
Any retailer on non-Sky „platforms‟18 in the UK will be entitled to obtain Sky Sports 1 and Sky Sports 2 on a wholesale basis from Sky, if it meets minimum qualifying criteria and minimum security requirements. As noted earlier, however, pending the outcome of the forthcoming appeal process, only BT, Virgin Media and Top-Up TV will be entitled to avail of the remedy.
Rather than setting all of the relevant wholesale terms and conditions itself, Ofcom has required Sky to make available to third parties a „reference offer‟ setting out the detail of the terms and conditions of supply; this is to include, for example, the detail of Sky‟s minimum security requirements.
With regard to the supply of high definition versions of its channels, Sky is only obliged to wholesale these on fair, reasonable and non-discriminatory terms. Ofcom recognised that, as high definition is a relatively recent innovation, there is a degree of uncertainty surrounding the setting of prices for such new products and it did not wish to undermine incentives for future innovation by imposing an overly-intrusive pricing obligation.
16 Pay TV Statement, para. 7.7. 17 Pay TV Statement, para. 9.134. 18 As defined by Ofcom in para. 9.188 of the Pay TV Statement. Ofcom draws a distinction between „distribution technologies‟ (such as Satellite, cable, DTT, broadband) and „platforms‟, which are „the set of devices or software applications under the operational control of one operator that are used to present a range of available content to the end user (eg through the operation of an electronic programme guide) and restrict the viewing of that content to those end users that are entitled to view it (e.g. through the operation of Conditional Access or Digital Rights Management technologies). Competition 7
By contrast, for the standard versions of Sky Sports 1 and Sky Sports 2, Ofcom has imposed a detailed wholesale pricing obligation. The regulated prices are calculated on a „retail-minus‟ basis ie, the retail price Sky charges for these channels, less retail distribution costs.
Ofcom recognises that the establishment of these regulated prices raises a host of complex issues. In particular:
Sky does not, in principle, retail these sports channels on a stand-alone basis, so a separate Sky retail price for these channels cannot readily be identified. Typically, consumers are required to purchase Sky‟s „basic‟ channels before they can purchase any of Sky‟s premium channels. Also, consumers are increasingly purchasing Sky‟s premium channels as part of a bundled offering which includes broadband and/or telephony from Sky.
Normally, it would be expected that Ofcom would deduct from this retail price only the retail costs of an „equally‟ efficient competitor. Deducting further costs risks requiring Sky to subsidise inefficient entry. The difficulty in the present case, however, is that given Sky‟s scale, if only the retail costs of an equally efficient operator were deducted, it is unlikely that the resulting wholesale price would be sufficiently attractive to encourage market entry by the various operators which are all very considerably smaller than Sky and which, hence, have higher average costs. Accordingly:
“We have derived prices for competitors that would be as efficient as Sky at equivalent scale, but do not have the same scale as Sky. Given the number of subscribers Sky has built up, there is not room in the market for more than one firm to have the same scale as Sky currently has. Therefore any remedy which sets out to ensure fair and effective competition has to allow for smaller scale. However, our approach is also designed to avoid the costs of market entry by firms that are either inefficient or unable to achieve sustainable scale.”19
Ofcom notes that the new regulated wholesale price for Sky Sports 1 and Sky Sports 2 is 23.4% below the current rate card price for each of these channels (10.5% below the current rate card price for the bundle of both these channels).
Ofcom anticipates that its wholesaling remedy will deliver “substantial benefits to consumers”. In particular, Ofcom anticipates that the DTT platform will become more attractive (and compete more effectively with the satellite and cable platforms) as the premium Pay TV services become available on this platform. Also, access to the Sky channels “will incentivise investment in new means of distributing content, such as faster
19 Pay TV Statement, para. 10.3. 8 Ciaran Walker broadband networks. In the longer term this will result in a range of innovative new services for consumers.”20
Ofcom‟s view is that this remedy will not have a negative effect on Sky‟s incentives to invest. “The potential negative impact of the relatively modest price decrease we are implementing should be more than offset by market expansion effects.”21 Also, Ofcom states that “we have designed the remedy to minimise the potential risk of any negative impact on the value of sports rights”. This claim is being challenged by the FAPL, which is appealing Ofcom‟s Pay TV Statement, along with the governing bodies of a number of other sports, which have intervened in the appeal process (the rugby football league, rugby football union, professional golf association European tour, football league, England and Wales cricket board).. The FAPL has already argued before the Competition Appeal Tribunal that Ofcom‟s remedy “will have a lasting and negative effect on the value of the Premier League‟s rights”22. The concern is that Sky‟s competitors are less likely to compete vigorously for sports rights when they become available if they can simply acquire the content, if it is shown on Sky Sports 1 or Sky Sports 2, on regulated wholesale terms from Sky.
E. Conclusions
Ofcom‟s Pay TV Statement raises important and very interesting issues relating to the circumstances in which an undertaking with market power and which has invested significant sums in developing highly-valued property (in this case, premium sports channels), should be required by law to make this property available to third parties on a wholesale basis. It remains to be seen whether Ofcom‟s conclusions will withstand the various appeals currently before the CAT. .
Ciaran Walker is an independent consultant, specialising in advising on competition law and regulation in the communications industry.
For over 11 years, to April 2010, Ciaran was Senior Competition Counsel at BT Group Plc.
Ciaran has over 20 years' experience of advising in complex competition and regulatory law investigations and litigation before the UK and EU authorities and courts. Ciaran has led BT teams in a number of cutting-edge Competition Act cases before Ofcom and the Competition Appeal Tribunal, including the major Ofcom investigations into BT‟s broadband pricing, which involved allegations of a 'margin squeeze'. Furthermore, he has represented BT in a number of Competition Commission investigations.
20 Pay TV Statement, para. 1.10. 21 Pay TV Statement, para. 1.11. 22 Counsel for the FA Premier League at a hearing before the Competition Appeal Tribunal, 23 April 2010 (http://www.catribunal.org.uk/files/1152IR_BSKYB_Transcript_DAY1_23.05.10.pdf, at p.3, lines 29-30). Competition 9
Ciaran has also been centrally involved in BT‟s regulatory strategy on entertainment content-related issues. In particular : Ofcom's pay TV market investigation; the 'Canvas' IPTV joint venture, which includes BT, the BBC, ITV, Channel 4 and Five.
Prior to joining BT, in 1989, Ciaran was a Senior Associate at the City law firm Simmons & Simmons. His experience at Simmons & Simmons included pleading in high-profile cases before the European Court of Justice and European General Court.
BT is one of the world‟s leading providers of communications solutions operating in more than 170 countries. Principal activities include networked IT services, local, national and international telecommunications services, and higher value broadband and internet products and services.