BBC Worldwide Limited, Channel Four Television Corporation and ITV plc A report on the anticipated joint venture between BBC Worldwide Limited, Channel Four Television Corporation and ITV plc relating to the video on demand sector 4 February 2009 © Competition Commission 2009 Website: www.competition-commission.org.uk ii Members of the Competition Commission who conducted this inquiry Peter Freeman (Chairman of the Group) Ivar Grey Peter Jones Christopher Smallwood Chief Executive and Secretary of the Competition Commission Martin Stanley The Competition Commission has excluded from this published version of the provisional findings report information which the inquiry group considers should be excluded having regard to the three considerations set out in section 244 of the Enterprise Act 2002 (specified information: considerations relevant to disclosure). The omissions are indicated by . Some numbers have been replaced by a range. These are shown in square brackets. Non-sensitive alternative wording is also indicated in square brackets. iii Anticipated joint venture between BBC Worldwide Limited, Channel Four Television Corporation and ITV plc Contents Page Summary................................................................................................................................. 3 Findings .................................................................................................................................. 8 1. The reference.................................................................................................................... 8 2. Industry overview and the companies............................................................................... 8 Industry overview .............................................................................................................. 8 Regulatory regime............................................................................................................. 9 Licensing of intellectual property rights........................................................................... 10 The parties ...................................................................................................................... 11 BBC/BBCW ............................................................................................................... 12 C4C ........................................................................................................................... 13 ITV.............................................................................................................................13 3. The transaction ............................................................................................................... 14 History of the transaction ................................................................................................ 14 Description of the JV....................................................................................................... 14 Overview ................................................................................................................... 14 Licensing of content to UKVOD ................................................................................ 15 Existing VOD syndication businesses....................................................................... 16 Additional 4OD contributions by C4C........................................................................ 16 Rationale for the transaction ........................................................................................... 16 Counterfactual................................................................................................................. 18 BBC/BBCW ............................................................................................................... 18 C4C ........................................................................................................................... 19 ITV.............................................................................................................................19 Conclusion on counterfactual.................................................................................... 20 Jurisdiction ...................................................................................................................... 20 Enterprises ceasing to be distinct ............................................................................. 20 Share of supply test .................................................................................................. 22 4. Market definition and competitive assessment ............................................................... 23 Overview ......................................................................................................................... 23 Market definition.............................................................................................................. 23 Content...................................................................................................................... 25 Catch-up and archive ................................................................................................ 28 Delivery mechanisms ................................................................................................ 29 Non-VOD TV content ................................................................................................ 30 Conclusions on market definition .............................................................................. 30 Underlying factors affecting competition ......................................................................... 31 Overview of VOD retailers......................................................................................... 31 Market shares ........................................................................................................... 33 Competitive assessment................................................................................................. 34 Levels of competition absent the JV ......................................................................... 35 Entry and expansion ................................................................................................. 41 Impact of the JV ........................................................................................................ 44 Conclusions on competitive effects........................................................................... 47 Other areas .....................................................................................................................47 Advertising ................................................................................................................ 47 Content acquisition.................................................................................................... 50 Conclusions on the SLC test........................................................................................... 51 5. Remedies........................................................................................................................51 The remedy options ........................................................................................................ 52 1 Effectiveness of remedy options ............................................................................... 52 Relevant customer benefits....................................................................................... 64 Cost of remedies and proportionality ........................................................................ 66 Conclusion on proposed remedies............................................................................ 67 Appendices A: Terms of reference and conduct of the inquiry B: Intellectual property rights C: Description of the JV D: Rationale for the JV E: Market shares F: Retail supply of VOD services G: Wholesale supply of VOD content rights H: Quantitative analysis of VOD services I: Barriers to entry and expansion Glossary 2 Summary 1. On 30 June 2008, the Office of Fair Trading (OFT) referred the anticipated joint venture (JV) between the British Broadcasting Corporation (BBC) through BBC Worldwide Limited (BBCW), Channel Four Television Corporation (C4C) and ITV plc (ITV) relating to the video on demand (VOD) sector to the Competition Commission (CC) for investigation and report. The reference was made under section 33(1) of the Enterprise Act 2002 (the Act). Following an extension of the original 24-week inquiry period under section 39(4) of the Act, we are required to publish our final report by 8 February 2009. 2. VOD covers a range of technologies which allow the consumer to select audiovisual content for immediate or subsequent viewing, rather than being restricted to the ‘linear’ TV schedule put together by the broadcasters. The VOD supply chain starts with programme production or the acquisition of rights to exploit content for VOD purposes. UK broadcasters have three main sources for their audiovisual content: in- house production; commissioning from third-party production companies; and the licensing of rights to exploit existing content. Rights owners may provide a VOD service directly to consumers or may wholesale content to retailers, who will deliver VOD to viewers. The viewer can access content over the Internet without subscrip- tion (typically referred to as open VOD) or in a variety of ways with a subscription or using dedicated hardware or connections (typically referred to as closed VOD). Closed