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.