Memorandum submitted by British Sky Broadcasting
(BSkyB)
KEY POINTS
— Digital television has been a British
success. Over 35 per cent of UK homes have now gone digital—that
is more than anywhere else in Europe.
— Sky recommends that Government conduct
a cost-benefit analysis of proposals that may need to be adopted
to achieve analogue switch-off, to ensure that the benefits outweigh
the costs.
— Sky supports the Government's policy
of platform neutrality. It does not believe that policies should
favour certain broadcasters, operators or platforms over others.
— Digital satellite is the only open
platform in the UK. Any broadcaster can obtain satellite capacity
and retail its own channels.
— Access to Sky's EPG and conditional
access services is regulated, and Sky "must offer" these
services to all-comers on a fair, reasonable and non-discriminatory
basis.
— Despite the "digital dividend"
from broadcasting on satellite, ITV withheld ITV1 from the Sky
platform for three years in order to boost the take-up of ONdigital
(now ITV Digital), the pay-TV operator owned jointly by Carlton
and Granada.
— ITV Sport is currently not available
to satellite viewers for the same reason (ie ITV is withholding
the channel). Sky has no ability to prevent the broadcasting of
any channel on digital satellite.
— Sky agrees with the Government's
Digital Viewers' Panel, which concluded that it would be "unwise
to require that only digital televisions can be sold in future
(this) might restrict innovation and could well limit viewers'
access to new features developed within the lifetime of their
set" (December 2001).
— The BBC claims that driving digital
take-up is a key objective for BBC3, its proposed service for
25-34 year olds. Yet over 60 per cent of 25-34s are already cable,
satellite or digital terrestrial television viewers—and
of the remaining analogue terrestrial only 25-34 year old viewers,
over 40 per cent already intend to purchase digital.
BACKGROUND ON
SKY
1. Thirteen years ago Sky pioneered direct
to home (DTH) satellite broadcasting in the UK. At enormous risk
and expense the company initially launched four new channels including
Europe's first indigenous 24-hour news channel, Sky News. At a
stroke, Sky doubled the number of channels available to British
viewers, introduced competition into the television market-place,
and created a new broadcasting platform open to others.
2. Other broadcasters soon followed Sky's
lead by leasing transponders and riding on the back of the distribution
base, the audience and the marketing investment created by Sky.
By the mid-1990s more than 40 channels were available to UK viewers
on the analogue satellite platform, of which Sky-owned channels
comprised a minority.
3. In 1998 Sky became the first broadcaster
to launch a digital service in the UK. Three years later, it became
the first (and remains the only) platform to have switched off
its analogue signal.
4. To date the company has invested more
than £2 billion in digital television. Approximately 5.5
million satellite homes now have Sky Digital—with seven
million expected by the end of next year. Digital satellite viewers
can choose from more than 200 channels from many different broadcasters,
including BBC, ITV, Channel 4, Discovery Networks Europe, National
Geographic, History Channel and Arts world. Viewers can receive
more free-to-air (non-subscription) channels—and radio services—through
digital satellite than through digital terrestrial television.
5. Digital satellite is an open platform,
in contrast to digital terrestrial and cable. Broadcasters can
obtain capacity from the satellite operator, SES, and retail their
own channels.
6. Access to Sky's electronic programme
guide (EPG) and conditional access (encryption) services are regulated
by OFTEL; Sky is under an obligation to offer these services to
all-comers on a fair, reasonable and non-discriminatory basis.
7. Sky has pioneered the development of
interactive television in the UK. Viewers can send e-mails, shop
on screen, play games, place bets, bookmark favourite channels
and manage their finances. Sky Sports Active enables viewers to
change camera angles, access match statistics and watch the highlights.
Sky News Active gives viewers a choice of news feeds and summaries.
Sky's Wireless Markup Language (WML) browser means it now has
one of the world's biggest networks of internet-related devices.
8. In late 2001 the company launched the
UK's first fully integrated personal television recorder, Sky+.
It allows viewers to watch one digital satellite programme while
recording another; automatically record episodes from their favourite
series without videotape; and pause live television.
ISSUES
9. Sky commented on three key issues in
its memorandum to the Committee's previous inquiry on the Communications
White Paper last year: the regulatory structure; public service
broadcasting; and ownership. Sky's views on those issues remain
valid.
10. A number of developments and issues
have arisen since that time which may be of interest to the Committee
including: the launch of some ITV services on digital satellite;
BBC and ITV's campaign for a "must carry" rule on satellite;
publication of the Government's Digital Television Action Plan;
the OFT investigation of Sky; and the BBC's new application for
BBC 3.
ITV ON SATELLITE
11. In November 2001, ITV1 launched on digital
satellite with 16 regional services, comprising each of the 14
ITV regions and separate services for Border England and Border
Scotland and for HTV Wales and HTV West.
12. This reversed ITV's longstanding strategy
of withholding ITV1 from the digital satellite (DSat) platform
in order to boost the take up of ONdigital (now ITV Digital),
the pay-TV operator owned jointly by Carlton and Granada. As a
senior ITV executive explained to The Guardian in 1998: "We
all need to limit the increase in digital satellite television,
not encourage it" (28 March 1998).
13. Stuart Prebble, ITV Chief Executive,
described the arrival of ITV1 on DSat as "good news for satellite
viewers", who would now be able to watch the main ITV service
in each region on the digital electronic programme guide (EPG)
on channel 103, and "good for ITV, which benefits from the
`digital dividend' which, we receive for encouraging digital viewing."
14. Granada announced that it "would
immediately earn a net £22 million per annum from increased
digital dividend" as a result of its distribution to 5.5
million DSat homes. It made clear that this would be an "annual
saving", after accounting for the costs of satellite transponders,
uplink and conditional access services.
15. ITV2 also launched on DSat in late 2001,
instantly increasing the channel's distribution by over 150 per
cent. Stuart Prebble stated that "this dramatic increase
in distribution will allow (ITV2) to realise its potential. In
this competitive multi-channel world this deal will increase both
the distribution and visibility of our channels".
ITV SPORT
16. Sky has recently received a number of
queries from MPs about the non-availability of the ITV Sport channel—which
broadcasts the Nationwide League and Worthington Cup—on
DSat.
17. ITV has deliberately withheld the ITV
Sport channel from satellite viewers whilst adopting a policy
of blaming its lack of availability on Sky.
— Last year, Gerry Murphy, Chief Executive
of Carlton, told Mediaweek (25 June 2001) that ITV Digital would
have more sport than any other platform because of its exclusive
distribution of the ITV Sport channel.
— Rob Fyfe, Chief Operating Officer
of ITV Digital, told the Daily Mail that he had "been fighting
long and hard" to keep ITV Sport exclusive to ITV Digital
(26 July 2001).
18. If ITV does eventually decide that it
wants to make ITV Sport available via digital satellite, it can
adopt one of two approaches.
19. It could supply the channel to Sky for
inclusion in its retail packages. Sky has offered ITV terms for
such a distribution deal but ITV has declined to negotiate. Or,
it could retail the channel itself by taking conditional access
services from Sky.
20. Satellite is an open platform. Sky is
obliged to offer conditional access services to all-comers on
fair, reasonable and non-discriminatory terms, regulated by Oftel.
To date, ITV has not taken up either option. Sky has not, and
is not in a position to, deny access to ITV Sport. Sky hopes that
ITV will soon make the ITV Sport channel available to digital
satellite viewers by one of these means.
"MUST CARRY"
21. In its evidence to the Committee's previous
inquiry, ITV called for the extension of "must carry"
requirements to conditional access services on satellite. It argued
that this was a necessary quid pro quo for the Government's
desire to see carriage of the core public service channels on
every digital platform. Sky subsequently submitted a supplementary
memorandum to the Committee in order to correct the misimpression
that could have resulted from ITV's evidence.
22. It must be recognised that there is
not, as yet, a "must offer" requirement on public service
broadcasters. Indeed, it was ITV's longstanding refusal to make
the nation's then most watched channel available to satellite
viewers—despite the availability and platform-neutral stance
of every other UK public service broadcaster—that culminated
in the "must offer" proposals being included in the
White Paper.
23. ITV and the BBC have also campaigned
jointly in Brussels and Strasbourg for the extension of "must
carry" via European legislation. They argue that their obligation
to make services universally available—particularly if they
are under a "must offer" requirement—is not matched
by an equivalent obligation on conditional access providers, thus
weakening their negotiating position.
24. This is incorrect. Sky has effectively
been under a "must offer" requirement since the inception
of the DSat platform. It has always been obliged by law to offer
its conditional access services to all-comers (whether a public
service broadcaster or any other channel) on a fair, reasonable
and non-discriminatory basis.
25. BBC and ITV claim that their "public
service obligations" should entitle them to a reduction from
the "fair, reasonable and non-discriminatory" price
charged by Sky for use of its conditional access services. But
no other good or service which public service broadcasters require
in order to broadcast by digital satellite is purchased at such
a reduced rate. Neither BBC or ITV, for example, is entitled to
cheap uplink services, transponder capacity, electricity or programming.
26. There is no case for singling out conditional
access for a special subsidy. If public service broadcasters are
not prepared to accept fair and reasonable charges, they are by
definition seeking charges that are unfair and unreasonable to
the conditional access provider—and also to other broadcasters
taking those services, who in practice would be faced with supporting
a higher share of the overall costs as a consequence.
27. Nor is there any rationale for extending
existing cable "must carry" requirements to satellite.
The "must carry" obligations were imposed on cable and
not satellite because of specific differences between the platforms:
— Cable operators have closed platforms,
unlike DSat which is open. Thus, cable operators can refuse to
carry non-"must carry" channels.
— Cable operators retail "must
carry" public service channels as part of their basic packages.
Even the lowest cable access tier with BBC, ITV, Channel 4 and
Channel 5 carries a monthly fee, whereas these services are not
part of any Sky package, and are offered entirely free-to-air
on satellite. Cable operators derive revenue from supplying the
public service channels; Sky does not.
— Cable operators were initially granted
exclusive rights to provide services in their franchise areas
and were subject to capacity constraints in their analogue systems.
DIGITAL ACTION
PLAN
28. In December 2001 the Government published
a Digital Action Plan with the aim of setting out "a series
of actions which need to be undertaken to ensure the switchover
from analogue to digital television takes place, to identify who
should lead on those issues and to set target dates for delivery."
29. It is essential to remember that the
Government has probably the most to gain from switch-off because
it will be able to auction off analogue spectrum post-switchover,
although the value of that spectrum is unclear. Despite this,
Government has proposed a series of measures which are likely
to impact on different stakeholders in different ways—the
cost of which has not been assessed. Sky believes that the Government
should therefore conduct a cost-benefit analysis of analogue switch-off.
30. Ideally, this would have been carried
out before the Digital Action Plan was published in order to ascertain
whether the benefits of analogue switch-off exceed the cost of
the measures deemed necessary for switchover. (Sky identified
the need for Government to weigh these costs and benefits in 1995,
in its response to the Government's proposals for DTT.) If the
benefits—whether in terms of efficiency or Exchequer yield—of
the ultimate re-use of any cleared spectrum are not measured,
then there is no way of knowing whether the proposed actions are
proportionate in relation to those benefits.
31. One of the issues which is to be examined
as part of the Digital Action Plan is the transition to integrated
digital televisions (idTVs). It has been argued that the Government
should mandate idTVs, in effect outlawing the sale of analogue-only
television sets from a future date.
32. The Government's Viewers' Panel looked
at this issue and concluded that it would be "unwise to require
that only digital televisions can be sold in future" (Viewer
Choice and Digital Television, December 2001). It went on to point
out that:
— "digital receiver architecture
and software is changing rapidly, and that existing idTVs have
only a limited capacity to be upgraded. Mandating the sale of
idTVs might restrict innovation and could well limit viewers'
access to new features developed within the lifetime of their
set"; and
— "some commentators have suggested
that television technology is likely to move away from the integrated-receiver
model towards a monitor/screen plus STB (set top box) combination.
An upgradeable STB could well provide viewers with a simple and
cheap way to switch to digital using their existing equipment".
33. Sky strongly supports these views and
is concerned that mandating idTV's would not be in the best interests
of UK consumers for the following reasons:
— idTVs are more expensive than an
equivalent analogue set;
— All consumers wanting to buy a new
TV would have to pay the additional price—even those who
already had a set-top box; and
— Consumers forced to buy an idTV may
still require a set top box if they wish to access the full range
of digital services available (eg full interactivity).
34. Last year ITV—with the support
of European TV manufacturers—mounted a campaign to convince
the EU to mandate idTVs in the future. In a speech to European
public service broadcasters, Stuart Prebble, Chief Executive of
ITV, argued that compulsory digital tuners in new television sets
(the cheapest option of which is a free-to-air DTT tuner) would
provide a "compelling" advantage—not for maximising
consumer choice and freedom, but for public service broadcasters—because:
"For reasons of (limited DTT channel) capacity,
and our own visibility, public service broadcasters will retain
a bigger share of viewing on an idTV than we will on a pay platform"
(despite the availability of public service channels and other
free-to-air services on DSat).
35. Sky believes that Government policies
should not favour certain broadcasters, operators or platforms
over others.
36. Sky supports the Government's stated
position of platform neutrality. It believes that the Government
should conduct a cost benefit analysis on any proposals in this
area to ensure that they do not hinder the development of particular
platforms or alter the commercial balance between competing operators.
Sky has not asked for, nor has it received, Government assistance
for the development of DSat—the platform that has contributed
the most to date in terms of digital take-up and increased programme
choice.
37. In addition, if the Government is to
be genuinely platform neutral, it should not grant DTT preferential
status post switchover. When analogue terrestrial broadcasting
is switched off, universal coverage will be achieved through a
combination of satellite, cable and terrestrial distribution—with
consumers having a choice of one, two and sometimes three platforms.
No consumer will be denied access to public service broadcasting
channels, including regional services, post switch-off.
Sky looks forward to participating in, and contributing
its experience to, the Stakeholders' and Task Groups established
under the Digital Action Plan.
OFT INVESTIGATION
38. The OFT first started investigating
Sky in 1995 and it has been more or less continuous ever since.
The OFT initially indicated that it would commence its current
investigation into Sky in December 1999 (then under the Fair Trading
Act, and later under the Competition Act.)
39. Despite the time that has elapsed, only
in December 2001 has the OFT given Sky the first indication of
the allegations against it. Sky has now—for the first time—an
opportunity to respond to those allegations. No decision is expected
before summer 2002.
40. The OFT has taken the preliminary stance
that Sky has abused its alleged dominant position (in a market
identified by the OFT as the wholesale market for premium movie
and sports channels) through the prices it has charged distributors
over the period which the OFT are investigating (March 2000 to
June 2001). During this period Sky acted responsibly at all times,
keeping the OFT fully informed of its actions.
41. In 1996, the DGFT had sought and obtained
undertakings from Sky which, inter alia, required Sky to contract
with cable operators for the supply of certain of its channels
only on the terms of a rate card, the discounts under which had
been approved by the DGFT. Sky was not entitled to contract with
cable operators for supply of these channels on any other terms.
In addition, in order to guard against potential for margin squeeze,
Sky undertook to comply with an accounting separation test, separating
the accounts for its broadcasting business from its DTH retail
business according to the methodology laid down by the OFT.
42. Despite Sky's requests, the DGFT has
not, to date, formally released Sky from the key provisions of
these undertakings. During the period under review, therefore,
Sky complied with these undertakings by offering its channels
only on the terms of the DGFT-approved rate card, and it applied
the OFT's accounting separation test to its retail business.
43. However, the OFT notified Sky in December
2001 that implementing the discounts in Sky's cable rate card
(which the DGFT approved and required of Sky) is an abuse of Sky's
dominant position. The OFT has also developed a new accounting
separation test for margin squeeze, communicated to Sky only in
December 2001, which is different to the accounting separation
test that it had previously imposed on Sky. The OFT is now seeking
to impose this new test on Sky retrospectively.
44. Sky contends that a UK regulator cannot
seek undertakings from a company which require it to observe certain
behaviour and later accuse that company of abusive behaviour by
compliance with those undertakings. Sky will be defending its
position vigorously in the months to come.
45. Overall, it is difficult for Sky to
have confidence in a regime where the body sitting in judgement
(the OFT) is also conducting the prosecution. Sky has a right
of appeal from the OFT's decision to the Competition Commission
Appeals Tribunal. Sky will utilise that option if necessary.
BBC3 PROPOSAL
46. In December 2001 the BBC submitted a
new application for BBC3, a new licence-fee-funded digital television
service to replace the evening schedule on BBC Choice. The proposal
was submitted following the Secretary of State's decision three
months earlier not to approve the original BBC3 proposal.
47. The BBC claims that this new public
service channel for young adults (25-34s) will drive digital take-up
and thus help to facilitate analogue switch-off. There is no credible
evidence to support this assertion—the BBC's research asked
"motherhood and apple pie" questions, which revealed
only that some people might be more interested in digital TV as
a result of BBC3, but said nothing about whether it would actually
make a decisive difference to their intentions.
48. If driving take-up was a key objective
for a new BBC service, it is hard to see why the BBC would target
this audience, who already have higher multi-channel television
penetration than almost any other age group.
— More than 60 per cent of 25-34 year
olds are already multi-channel cable, satellite or digital terrestrial
television viewers.
— Of the remaining analogue terrestrial-only
25-34s, over 40 per cent already intend to purchase digital.
49. Resources targeted at those regarded
as the core "digital refusniks", the less well off and
those over 55, would be more logical than the creation of a service
that seems to be designed for this polar opposite group.
50. The BBC also wrongly claims that 25-34
year olds are not currently well served by the commercial sector.
While no other single digital channel may have the same mix of
genres or Government-granted budget for original content, over
a range of services they are already very well served. Indeed,
there is some suspicion that it is because they are so well served
that the BBC wishes to launch its own offering to compete in the
market place.
51. The Committee has previously expressed
interest in the viewing figures for new BBC digital services generally,
and also the performance of BBC News 24 as compared to Sky News.
Annex 3 provides updated information. Among other things this
shows that:
— The BBC's new digital channels—in
aggregate—continue to account for less than one per cent
of all UK television viewing and less than two per cent of television
viewing across multi-channel cable, satellite and digital terrestrial
homes.
— On average, fewer than two in 10
viewers in multi-channel homes watch any one of the BBC's new
digital channels for more than three consecutive minutes per week.
— Sky News continues to attract a higher
share of viewing than the BBC's dedicated news channel across
multi-channel cable, satellite and digital terrestrial home—despite
the fact that BBC News 24 reaches more than 1.2 million additional
homes through Government-granted DTT capacity that is unavailable
to Sky News.
— In Sky Digital homes, where Sky News
and BBC News 24 are equally available, Sky News' share of viewing
is nearly three times that of BBC News 24, despite the constant
cross promotion afforded to BBC News 24 across the BBC's (universal)
analogue and digital television and radio services.
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