Assessing the Competitive Implications of Partial Ownership General Economic Framework and Its Application to the Bskyb/ITV Case
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Assessing the competitive implications of partial ownership General economic framework and its application to the BSkyB/ITV case 05 December 2008 © Frontier Economics Ltd, London. 2 The BSkyB/ITV case 3 The parties British Sky Broadcasting Group plc (BSkyB) The UK’s largest pay-TV broadcaster of sports, movies, entertainment and news Acquires rights/programming to broadcast on its own channels Supplies its channels on a wholesale basis to other broadcasters (e.g. Virgin Media - cable) Retails pay-TV channels (its own and those of third parties) to subscribers - satellite Three of BSkyB’s channels available free-to-air (FTA) as part of the “Freeview” offering via the UK digital terrestrial (DTT) platform - BSkyB has a 20% stake in DTV Services Limited (DTVSL), the consortium which owns and markets Freeview Around 75% of BSkyB’s revenue is derived from subscriptions, advertising makes up only a small proportion of its revenues ITV plc (ITV) The UK’s largest commercial broadcaster for more than 50 years Producer of content through ITV Productions and a broadcaster of FTA TV content Holds a 40% stake in Independent Television News Limited (ITN) and a 20% stake in DTVSL Around 75% of ITV’s turnover is derived from advertising 4 Summary of case On 17 November 2006, BSkyB announced that it had acquired 696 million shares in ITV for a total price of £940 million, amounting to 17.9 per cent of ITV’s issued share capital The acquisition took place without any prior consultation of ITV, shortly after Virgin Media had approached ITV with an indicative cash and share offer to acquire the whole of ITV On 24 May 2007, the Secretary of State for Business, Enterprise and Regulatory Reform (BERR) referred the acquisition to the Competition Commission (CC) for investigation and report • Given the regulatory regime, the CC had to explore both competition and media plurality implications - this presentation focuses on the investigation of competition aspects only The CC published its report in December 2007 • It concluded that the transaction would give BSkyB the ability materially to influence ITV’s policy – meaning the management of the business, particularly in relation to its competitive conduct, including the strategic direction of the company • The CC found that the transaction would lead to a significant lessening of competition (SLC) in the all-TV market (including both pay-TV and FTA services) - BSkyB would have both the incentive and the ability to influence ITV’s behaviour so as to weaken the competitive constraint ITV posed on BSkyB’s conduct • As a remedy, the CC suggested that BSkyB should reduce its shareholding in ITV to below 7.5% - this would eliminate BSkyB’s ability materially to influence ITV’s policy BSkyB appealed the CC’s decision before the Competition Appeal Tribunal – on 29 September 2008, the CAT judged that BSkyB’s challenges be rejected 5 The relevant markets In its analysis of competitive effects, the CC looked at three markets Market for audiovisual services Market for television advertising Market for the supply of national TV news programmes The CC found a SLC in one of these, the market for audiovisual services No SLC expected in advertising market Potential concern that the parties might coordinate to raise the price of TV advertising Contract Rights Renewal Remedy (CRR) currently prevents ITV from raising advertising prices for ITV1 and no evidence that parties would be able to raise advertising prices on other channels Nature of influence obtained by BSkyB unlikely to facilitate anti-competitive behaviour described by third parties (partitioning of audiences by scheduling programmes aimed at different demographics, bundling of sales, price decreases to engage in predatory pricing) No SLC expected in national TV news programme supply Indirect link between Sky News and ITN (through ITV’s 40% stake in ITN) Unlikely that the transaction would lead Sky News to compete less aggressively with ITN or to influence ITV to weaken ITN due to the size of BSkyB’s stake in ITV, the non-strategic nature of wholesale news provision and the fact that no new relevant news contracts will come up for renewal before 2010 No evidence to support increased likelihood of coordination between Sky News and ITN 6 Market for audiovisual services - the “all-TV market” The “all-TV market” is highly differentiated and includes FTA and pay-TV as well as video on demand (VoD) Based on customer switching data provided by BSkyB, the CC found that pay-TV packages are likely to be reasonable substitutes for one another - therefore all pay-TV should be in the same relevant market The CC followed BSkyB’s argument that there was a “chain of demand side substitution that links free to air services, basic only pay television packages and pay television packages that contain both premium and basic pay television channels” • However, the CC noted that FTA services are likely to be a closer substitute for pay-TV packages that include only basic channels • FTA services therefore represent a weaker constraint on pay-TV packages including premium channels The CC found that demand- and supply-side substitution between content suitable for VoD broadcasting and linear broadcasting were sufficient to include VoD in the same market • However, the CC noted that the competitive constraint of suppliers that only offer VoD was likely to be weaker than that of suppliers offering both VoD and linear broadcasting The CC rejected the argument that television-over-the-Internet and DVD sales/rentals were part of the same economic market 7 Audience and platform shares Audience shares by platform, 2006 100 8.5 7.7 18.0 1.6 90 22.7 7.3 28.8 15.0 29.7 80 6.7 14.9 5.9 8.7 70 5.1 7.7 Other 12.1 6.1 13.4 27.4 5.2 BSkyB (all channels) 60 11.2 3.3 3.7 20.8 10.4 Channel 5 (all channels) 50 4.1 9.3 3.8 Channel 4 (all channels) 19.7 3.0 40 17.5 ITV (digital channels) 17.2 15.7 ITV1 Audience share (%) share Audience 30 BBC (all channels) 48.5 20 41.6 Platform shares on main television sets, Q2 2007* 34.5 30.6 25.2 27.0 10 Analogue terrestrial 15.0% 0 All Analogue All multi- Digital Digital All cable terrestrial channel terrestrial satellite Digital terrestrial 35.9% Pay satellite 31.8% ADSL * Free-to-view satellite includes only those customers who only receive free-to-view satellite. IPTV falls 0.2% in the category ADSL in this chart. Viewing of television-over-the-Internet is not covered. The Cable 8 13.4% Free-to-view satellite television sets which receive analogue terrestrial will no longer be able to do so after analogue switch-off. 3.7% SLC in the “all-TV market” The CC concluded that BSkyB would have both the incentive and the ability to influence ITV’s strategy so as to weaken the constraint it imposed on BSkyB Incentive - the competitive constraint of the FTA offer on BSkyB’s services, and the importance of ITV within the FTA offer The CC found that FTA services posed a constraint on BSkyB’s pricing • Based on different market share measures (viewer, revenue and platform shares) BSkyB, ITV, the BBC and Virgin Media were the major competitors in the all-TV market • Virgin was the closest competitor to BSkyB, both in terms of the range of channels and the type of content offered • FTA services also exerted a constraint on BSkyB’s conduct: “BSkyB’s business model relies on the ability to persuade customers to pay for the content available in its packages, rather than opting for freely-available services” The CC found that the BBC and ITV were both key to the strength of the FTA offer (based on their viewer shares and their involvement in innovative initiatives such as DTVSL), with C4 and C5 also making a significant contribution Ability - by blocking special resolutions at general meetings, BSkyB could limit ITV’s ability to raise funds and thereby rule out strategic options and investments Given the dynamic environment in which ITV operates, the CC found it likely that the board would need to make major investments requiring external funding over the next 2 or 3 years The CC found that a non-pre-emptive rights issue would be the only feasible or efficient funding mechanism for some investments, requiring a special resolution 9 Examples of how BSkyB might exercise its influence BSkyB could seek to influence ITV’s strategy in relation to content production and commissioning Ofcom research suggests that viewers see content as the most important aspect of retail television services In September 2007, ITV had announced a five-year strategy plan which included a commitment to invest heavily in content, but these plans could be contested by shareholders BSkyB could prevent ITV from acquiring additional content rights, e.g. for major sports events BSkyB could seek to influence investment by ITV in high-definition television or in other services requiring additional spectrum Ofcom’s current proposals are to upgrade the DTT platform over the next few years to allow up to four HDTV channels for Public Service Broadcasters ITV might need to acquire additional spectrum to offer more HD channels While BSkyB might have an incentive to support the development of HD content by ITV, it might also have an incentive to reduce ITV’s ability to offer this content FTA BSkyB could seek to influence the course of any future transactions involving ITV BSkyB could influence ITV not to pursue certain acquisitions that would otherwise strengthen ITV’s position BSkyB could encourage the acquisition of ITV by another buyer who might act in BSkyB’s interest According