Review of the pay TV wholesale must-offer obligation Non-confidential version Consultation Publication date: 19 December 2014 Closing Date for Responses: 27 February 2015 About this document This document represents the first phase of our review of the rules that require Sky to offer its Sky Sports 1 and 2 channels to other pay TV retailers on wholesale basis. The review will decide whether regulation of the supply of key sports content remains appropriate and, if so, whether any changes to that regulation are necessary. In this document we consult on our assessment of whether, absent regulation, providers of channels which carry key sports content might limit distribution to some pay TV retailers and whether that would undermine competition. We plan to set out the conclusions of our assessment and, where necessary, consult further on any proposed remedies, in 2015. 1 Contents Section Page 1 Executive Summary 3 3 Developments in the pay TV sector 13 4 Analytical framework 29 5 Identifying key content 33 6 The impact of limited distribution of key content 45 7 Incentives to limit distribution of key content 61 8 Conclusions and next steps 72 Annex Page 1 Responding to this consultation 77 2 Ofcom’s consultation principles 79 3 Consultation response cover sheet 80 4 Consultation questions 82 5 Glossary 84 6 Survey evidence on the importance of Sky Sports and BT Sport 87 7 Estimating revenues from the supply of key sports channels 98 8 Bidding for sports rights 100 2 Section 1 1 Executive Summary 1.1 The wholesale must-offer (‘WMO’) obligation imposed in 2010 requires Sky to offer to wholesale its Sky Sports 1 and 2 (‘SS1&2’) channels to other pay TV retailers with certain prices and terms set by Ofcom. We are reviewing the extent to which the WMO obligation remains appropriate or whether it needs to be modified in any way or removed. The WMO was imposed in 2010 and there have been a number of developments in pay TV 1.2 In 2010, we issued a statement (‘the 2010 Pay TV Statement’) which imposed the WMO obligation on Sky under section 316 of the Communications Act 2003 (‘the Act’) by inserting a condition in the broadcast licences of each of SS1&2 (and their HD versions). We said we would review the WMO obligation after three years. 1.3 There have been a number of developments in the pay TV sector since 2010, including the wider availability of sports content on competing retail offerings and platforms, an increased presence of over-the-top internet services and new devices providing additional means of accessing pay TV content. BT has also acquired key sports rights, launched BT Sport and entered as a vertically integrated provider of sports channels and pay TV services. We will review whether there are practices which may prejudice fair and effective competition in pay TV services 1.4 The WMO obligation seeks to address competition concerns arising from the supply of premium sports content. This review is therefore focussed on competition concerns which may arise in connection with the supply of sports content and does not assess whether the supply of other types of content may also give rise to competition concerns. 1.5 At the core of the review is an assessment of whether, absent regulation, providers of channels which carry key sports content may engage in practices which would be prejudicial to fair and effective competition in the retailing of pay TV services on a forward-looking basis. Key sports content is that which is capable of influencing the choice of pay TV provider for a significant number of consumers. 1.6 We have identified two types of practice which might, in certain circumstances, give rise to concerns: i) non-supply of key content, i.e. key content not being supplied to certain pay TV retailers and/or platforms; and ii) distribution of key content but on terms which would not enable rivals to compete effectively in pay TV retailing or potentially other parts of the value chain. In this document we refer collectively to both types of practice as limited distribution. 1.7 Limited distribution of key sports content may make it more difficult for pay TV retailers to compete for subscribers who value this content and may therefore result 3 in barriers to expansion for those retailers. It may also affect the ability of pay TV retailers to develop their own channels through the acquisition of key sports content. 1.8 Our assessment considers three questions to determine the extent to which such practices may prejudice fair and effective competition: • What constitutes key content - i.e. is there content that is capable of influencing the choice of pay TV retailer for a significant number of subscribers? • To what extent would limited distribution of key content be likely to prejudice fair and effective competition? • To what extent do holders of key content have incentives to limit distribution of that content? 1.9 In this document, we have focussed on the impact of limited distribution of key sports content on competition between pay TV retailers who use traditional broadcast methods (such as digital terrestrial TV, satellite and cable) to offer linear channels bundled with on-demand services. We recognise that new pay TV services provided ‘over-the-top’ (‘OTT’) on the internet have emerged in recent years and may offer some alternative to pay TV subscribers. However, to date, OTT services have not offered the full range of services offered by more traditional pay TV retailers, being typically focused on on-demand movies and general entertainment. The majority of 1 subscribers to such services also subscribe to a more traditional pay TV service and may therefore view these services as only a partial substitute. In assessing the impact on competition of limited distribution of key sports content, we have therefore taken account of the fact that OTT providers offer only a limited competitive constraint at this stage. We recognise, however, that this position may change as OTT services develop. Limited distribution of Premier League and Champions League content may prejudice fair and effective competition 1.10 Our analysis indicates that the availability of sports content on a retail pay TV service continues to be an important driver of consumers’ choice of pay TV retailer – a large number of consumers pay a premium specifically to access sport content. Whilst consumer habits continue to evolve with the emergence of new services available on a variety of devices, the principal means of consumption of pay TV services continues to be through subscription to pay TV retail services which offer a core bundle of content and additional services. There are around [] subscribers on traditional pay TV services.2 1.11 Live coverage of Premier League matches stands out as being the most important sporting competition to a large number of consumers. The value that consumers place on this content is evident from the stated importance of this content compared to coverage of other sporting events and is reflected in the amount spent on sports 1 For example our November 2013 survey indicated that of those respondents that had paid to use LOVEFiLM (now Amazon Prime Instant Video) or Netflix, in the previous 6 months, 69% and 77% were also subscribers to pay TV services from Sky, Virgin Media, TalkTalk TV or BT TV. Question B1A. 2 Subscriptions to OTT services have been growing fast with Netflix now having around 3m UK subscribers. However, as noted in the previous footnote reference, the majority of OTT subscribers also have a subscription to a traditional pay TV service. 4 rights by channel operators. Statements made by market players reinforce this view that live Premier League content is of particular importance to consumers and pay TV operators alike. 1.12 Live Champions League coverage is also important to a large number of consumers, albeit to a lesser extent than live Premier League coverage, and may influence consumers’ choice of pay TV retailer. Coverage of other sporting events, however, does not appear to be sufficiently important such that on their own they would be capable of influencing a significant number of consumers’ choices of pay TV retailer. In light of those findings, we consider that live Premier League coverage and, to a lesser extent, live Champions League coverage are likely to influence the choice of pay TV retailer of a significant number of consumers and therefore constitute key content. 1.13 Limited distribution of this key sports content may diminish both static competition and dynamic competition if pay TV retailers are unable to compete for a significant number of high-value pay TV subscribers as a result and, in turn, are unable to grow their subscriber base as effectively as if they had had access to the key content. Competition may be impacted not only in respect of competition for high-value subscribers but also in respect of the provision of pay TV services to other subscribers. In addition, limited distribution of key sports content may also restrict the ability of pay TV retailers to develop their own sports channels through the acquisition of key sports content. Retail pay TV competition may therefore be less effective at a number of levels. 1.14 In considering the impact of limited distribution of key sports content on retail pay TV competition by particular market operators, we have assessed the amount of key sports content they hold and their market position. Where an operator holds only a small amount of key sports content, limited distribution of such content may result in little effect on competition in pay TV.