Pay TV market investigation Consultation document Publication date: 18 December 2007 Closing Date for Responses: 26 February 2008 1 Pay TV market investigation consultation Contents Section Page 1 Summary 3 2 Context 16 3 Overview of the UK pay TV market 23 4 The consumer experience of pay TV 45 5 Characteristics of the pay TV market 69 6 Operation of the market 101 7 Next steps 119 8 Summary of accompanying annexes 120 Annex Page 1 Responding to this consultation 122 2 Ofcom’s consultation principles 124 3 Consultation response cover sheet 125 4 Consultation questions 127 5 Impact Assessment 128 6 Glossary 129 Pay TV market investigation consultation Section 1 1 Summary Introduction 1.1 On 16 January 2007, Ofcom received a preliminary submission from British Telecommunications plc, Setanta Sport Holdings Limited, Top Up TV Europe Limited and Virgin Media Limited, which asks us to investigate the pay TV industry and to consider whether to make a market reference to the Competition Commission under the Enterprise Act 2002. 1.2 The submission alleges that competition in the UK pay TV industry is not working effectively and that there are features of the industry that result in competition being prevented, restricted or distorted. 1.3 These concerns led us to announce on 20 March 2007 that we would investigate the pay TV market. The eventual aim of this investigation is to determine whether there are competition issues in pay TV which require action by us. 1.4 Ofcom received a further submission in July, and a response from Sky in October. 1.5 Under our general duty to promote competition, we have been collecting evidence and carrying out analysis to gain a preliminary understanding of the operation of the pay TV market, and the outcome for consumers. We now wish to seek stakeholders’ views on this initial analysis, and on what it implies for the operation of the market. 1.6 We have not yet reached a conclusion on the existence of competition problems. We will use the responses to the consultation to determine what further steps, if any, should be taken in the investigation. The UK pay TV market 1.7 The emergence and growth of pay TV markets in the UK and elsewhere has been driven historically by cable and satellite broadcasters, providing consumers with the option of paying for a wider choice of content than had traditionally been available from free-to-air, terrestrial broadcasters. 1.8 In the UK the main cable and satellite pay TV operators are: • Sky, created by the merger of Sky Television and British Satellite Broadcasting in 1990. Sky now has 8.2 million retail subscribers in the UK. • Virgin Media, created by a consolidation over 13 years of the cable franchise areas created in 1984, culminating in the merger of NTL and Telewest in 2006, and the subsequent re-branding in 2007 to Virgin Media. Virgin now has 3.4 million subscribers. 1.9 Pay TV services have also been provided on Digital Terrestrial Television (DTT). ONdigital launched its service in 1998. It re-branded as ITV Digital in 2001, in an attempt to exploit the ITV brand, but went into administration in March 2002, after attempts to renegotiate the terms of its rights deal with the Football League failed. The number of subscribers reached a peak of 1.2 million at the end of 2001. 3 Pay TV market investigation consultation 1.10 Freeview was launched in 2002, using the DTT spectrum released following the failure of ITV Digital. It provided a credible free-to-air alternative for those consumers who wanted multi-channel TV but did not wish to pay for it. There are now 9.3 million Freeview-only households. 1.11 The historic growth in these pay TV and free-to-air services is illustrated in Figure 1 below. It is possible to distinguish three fairly distinct periods of growth: • Steady growth in analogue pay TV services during the 1990s, on both satellite and cable, driven by access to premium content, and in particular the acquisition by Sky in 1992 of exclusive rights to live Premier League football. • The migration from analogue to digital at the end of the 1990s, greatly increasing the range of content and value-added services that could be delivered to subscribers. • Over the last five years, continued growth of Sky’s satellite service and of Freeview, alongside very limited growth on cable. The key dynamic in recent years has been between Sky, driving growth in pay TV, and Freeview, driving growth in free-to-air multi-channel TV. Figure 1 Multi-channel TV penetration Households (millions) 25 Pay digital terrestrial Free digital terrestrial 20 Free-to-view digital satellite 15 Analogue cable Digital cable 10 Analogue satellite 5 Pay digital satellite 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: Ofcom, broadcasters, sales data 1.12 There have been a number of important recent developments, including: • The consolidation and restructuring of the historically fragmented UK cable industry under the Virgin Media brand. • The emergence of new platforms for delivering pay TV services (BT Vision, Top Up TV, Tiscali / Homechoice) based on new distribution technologies. • The intervention by the European Commission to change the way in which Premier League football rights are sold. The current football season is the first since 1992 for which Sky has not owned these rights exclusively. 4 Pay TV market investigation consultation • The increasing importance of convergence, and the bundling of pay TV services with broadband and voice services. 1.13 These mean that the future development of the market cannot simply be extrapolated from the past. In such circumstances it is particularly important that our competition analysis take a forward-looking view, focussing on those characteristics of the market which are most likely to influence its development over the next few years. The consumer experience 1.14 We have identified a set of criteria against which to assess whether the pay TV market is functioning well in terms of its impact on consumers: • Overall consumer satisfaction levels • Choice of platform and content • Innovation in platform services • Pricing of pay TV services 1.15 An initial assessment against these criteria suggests that pay TV has delivered significant benefits to consumers. This sector of the broadcast industry has grown from almost nothing in the early 1990s to one that now provides services to over 11 million consumers, and generates more revenue for the broadcast industry than any other source, as well as delivering reasonable levels of consumer satisfaction. We find that 84% of existing consumers of pay TV services are either very satisfied or fairly satisfied with their service. 1.16 Satisfaction levels of course only relate to those consumers currently purchasing pay TV services. There may be certain types of consumers who are not well served by pay TV in the sense that the pricing structure may serve to exclude them from the market. Around half of the consumers who currently take free-to-air digital TV cite price as a reason for not upgrading to a pay TV service. 1.17 Consumers have a significant level of choice, both of the TV platform which they use, and the content which they can access on this platform. There are however limitations to this choice, in relation to the geographic coverage of some distribution technologies, and the availability of some content across platforms: • Pay TV and free-to-air services based on both satellite and DTT are available to most consumers. However, digital cable is only available to 47% of the population, and relatively few UK consumers can as yet receive IPTV services. • The total number of channels available to UK consumers is second only to the US amongst our comparator countries (France, Germany, Italy, Spain, Sweden, US). Of the 24 most watched channels, most are available on satellite, cable, IPTV and DTT. The only exceptions are a small number of basic-tier channels owned by Sky (three Sky channels that are not available on cable, and two Sky channels that are not available on DTT). • Sky’s premium sport and movie channels are available on cable as well as via Sky’s own satellite platform and via “Sky by Wire” on IPTV, while Setanta’s premium sport channels are available on satellite, cable and DTT. However, 5 Pay TV market investigation consultation Sky’s cable channels do not have the same interactive capabilities as the satellite channels, and are not available in high definition. Sky’s premium content is not currently provided to other retailers on DTT, although Sky has recently proposed its own DTT service. 1.18 The sector has seen significant innovation in recent years. Entirely new platforms are being developed, based on new distribution technologies. Existing platforms have been enhanced to offer a range of new services, including digital video recorders (DVRs), high definition services, increasing availability of video on demand, and increasing levels of interactivity. 1.19 We have attempted to assess whether the benefits set out above have been delivered to consumers at a reasonable level of pricing. The results are however inconclusive. Part of the reason for this is that content markets such as pay TV are characterised by high fixed costs and low variable costs. The marginal cost of producing content for additional viewers is essentially zero, making it hard to establish a simple benchmark for pricing. 1.20 We have therefore compared UK prices with prices in other countries. A headline comparison of revenues per head indicates that UK prices may be high compared to other countries, even at purchasing power parity exchange rates.