Examination of Witnesses (Questions 180
- 197)
TUESDAY 29 JANUARY 2002
MR TONY
BALL, MS
SHEILA CASSELLS
AND MR
RAY GALLAGHER
180. What sort of guidelines or guidance do
you think the competition authorities should have to decide what
is appropriate in what is a very, very complex area?
(Mr Cassells) It is important first of all to remember
that competition law is backed up at the moment by ITC regulation
and there are rules on impartiality which we would expect to continue
into the future. The Competition Commission does not necessarily
need any specific guidance. Although many policy makers would
suggest otherwise, at the end of the day plurality is about a
consumer value and the Competition Commission is very well versed
in dealing with issues of the value to consumers of more or less
competitive environments. As happens now, it will take advice
from the ITC or OFCOM.
181. One of your more substantial owners is
a very significant owner of newspapers, has a significant share
of your company and interests in other media. There is a concern
that particularly sources of news and reporting are narrowing.
There must be certain public issues there or principles which
should apply in that case. What principles do you think should
apply? Is it simply commercial issues? What would you mean by
plurality in that context?
(Ms Cassells) The Government's recent consultation
paper on media ownership refers to plurality as being about sources
of content. We responded to that consultation paper in the context
of the digital world in which we now live where there are over
300 channels on digital satellite, there are six dedicated news
services, 60 per cent of satellite homes have access to the internet
and all the content that is available there. If Sky were able
to invest in Channel 3 or Channel 5 above the 20 per cent we are
allowed to do at the moment, that impartiality is actually backed
by an ITC regulation. If the ITC has confidence in its ability
to regulate, then that ought to be sufficient.
182. Is it part of your ambition to get into
terrestrial?
(Mr Ball) If the right opportunity were there, we
would look at it. There is a massive advantage for terrestrial
channels which also own pay channels, as we have seen with what
ITV are able to do by way of promoting their channels on their
free-to-air platform, what Channel 4 do by way of promoting their
pay television channels on their free-to-air platform. From Sky's
point of view, the economics of going into terrestrial would be
two-fold: the promotional power and also the power in acquiring
content. We spoke earlier about the difficulty of free marketing
content. If you are able to buy content across different windows,
by that I mean the window to show it on free television, the window
to show it on pay television, it gives you an advantage. We have
seen ourselves at a disadvantage against Channel 4 in acquiring
such content, where they are able to buy both windows and therefore
do a better deal. Indeed ITV has done the same with sport and
the Champions League where it has bought for the free window and
it has bought the pay window. Currently DG-IV are looking at the
fairness of all of that across content acquisition.
183. Are you saying that the present regulations
put your business at a disadvantage?
(Mr Ball) Yes. The fact that we cannot have more than
a 20 per cent control of a terrestrial radio definitely puts us
at a disadvantage from the cross-promotional point of view, the
content acquisition point of view.
184. It is not outwith the bounds of possibility
that something terrible will happen to ITV Digital and that business
will collapse. Broad band is quite a long way off. It is quite
feasible that you could be the only digital platform left. How
do you see that as a prospect? Is it one you would welcome?
(Mr Ball) No. Firstly, you are forgetting cable, which
is making a pretty good fist of rolling out digital services.
If you look at DTT, not from a British perspective but across
the world, it has got off to a pretty bad start everywhere, although
we have been more successful here than anywhere else in the world.
As to broadband, the real issue is that if we are really interested
in a connected Britain with all these wonderful things such as
interactivity, high speed internet access, I do not think digital
television is the area we should be so concerned about. It is
how fast are we rolling out ADSL, how fast are we rolling out
high speed internet access? That is where, for all the success
we are having in digital television, and most of that success
is coming from the commercial companies like the one I run making
massive bets and hopefully reaping the benefits in the future.
The area where we are dragging our heels is in rolling out broadband
services like ADSL. If you look at other countries in Europe,
Germany for example, they are making a fantastic job and have
over one million subscribers. To answer your question, no, we
would not be happy to see any of our competitors collapse, that
is not what we are about. Bear in mind that we make reasonable
revenues from ITV Digital and others because we are a content
supplier.
Chairman
185. Let me put to you a question which I deliberately
did not put to the ITV people because it seemed to me that whatever
reply they gave might have an impact upon the Granada or Carlton
share price and I thought it might be irresponsible to do this.
So I ask you. A year from now, do you think there will be an ITV
Digital? Do you think it will be in existence?
(Mr Ball) It really is a question for the two shareholders.
My view is this. We, Sky, were originally part of the consortium
which was called BDB in those days. We had an idea how this thing
might work and how it could be a complementary service to cable
or what have you. The business model ITV Digital have followed
is flawed. They tried to take on cable and indeed satellite at
what satellite and cable are best which is lots of bandwidth,
lots of choice, interactivity and they clearly cannot offer such
services. They have also tried to take on Sky in sport, which
means they are going after exactly the same kind of subscribers
that we garnered many years ago, instead of finding a new market,
a middle England type market which they should cater to. That
has left them in the position they are in now. I am sure they
have all sorts of ideas for how they might change that and this
free-to-air box we talked about earlier may be one and perhaps
they can piggy-back on the back of that. I should be surprised
if they were here in a year's time in their current form. There
will be some change in the way that they make their consumer proposition;
it could be a small change, it could be a big one. Certainly if
I were running it, I would do it differently.
186. Were they not on the horns of an insoluble
dilemma, namely that if they continue their strategies of attracting
new subscribers, the costs would become intolerable? So far as
I could gather, their generous offers to sign up subscribers were
so costly to them that so far as I could see, they would never
ever get the money back and might indeed be in a position where
the more subscribers they had the greater their financial plight.
On the other hand, if they did not continue those efforts to attract
subscribers, they would not get the subscribers and that being
so, for better or for worse—and I am sure their intentions
were very good—they had a problem that they could not solve
and it seems to me they still have a problem they cannot solve.
(Mr Ball) All their problems are of their own making.
These guys could not run a bath. Take some of the things they
have done there: for example, they peppered a limited spectrum
resource with their own channels, Carlton Food Network and some
of these Granada things, which subsequently I think they are getting
out of. Instead of signing up channels which were attractive but
may have cost them a bit more money, they chose not to do that.
They have taken a conditional access system, the one that governs
who can watch those channels, which is known to be flawed, which
has piracy problems which have got worse. You can buy an ITV Digital
card now for about £5 to get all the channels. A terrible
problem for them. They have made lots and lots of mistakes. One
benefit from that I am sure is going to be a fantastic business
school case study over the years of how not to launch a digital
platform. Can they dig themselves out of that hole? It is going
to be very difficult. This whole free-to-air box idea may help
them though I am very sceptical that people will buy up through
a box which I understand has a pretty limited specification. When
we do our consumer research or customer research there are a number
of things which make people go to digital: the amount of choice,
a lot of choice, which clearly they will not have because there
is not much spectrum; the interactivity; the other services. All
those things will not be there so it is going to be a real challenge
for them now to go back and correct those errors of the past.
It is a spectacular list of mistakes. The biggest mistake was
pushing us out.
187. And you are not smiling at all as you are
saying any of this to me.
(Mr Ball) No, I am not smiling.
188. The reason I am asking these questions
is not to gloat over their problem, though they do have a problem
and that problem includes a lack of a coherent strategy. I had
the feeling that Mr Prebble was sitting between Mr Jones and Mr
Desmond in order to keep them apart. If they were to collapse
or if you were to take them over, you would then have overwhelming
control of digital subscription for which you could not be blamed
in any way. You are a commercial organisation who are in the business
of gaining customers and making money and nobody can criticise
you for that. If you were in a position next year in which you
had 80-85 per cent of the digital subscribers, that is everybody
but cable, do you think that there would be anti-monopolists who
would say—it might be wrong, but nevertheless—Sky
has got too big for its boots and we are going to have to control
it in a much more stringent way?
(Mr Ball) If any company in any field had that much
of a market you are absolutely right, there would be people who
would call for that. DTT is not going to go away. Free-to-air
DTT, assuming we are all clear on what the prize is for analogue
switch-off, because I do not think a real cost/benefit analysis
has ever been done. We hear about the great benefits of getting
analogue back and selling that spectrum but no-one has put a price
or indeed a usage for that spectrum out there. Putting that to
one side, the way that the spectrum is used at the moment, if
ITV Digital were to have problems and they were not to be there
that spectrum could be opened up and used not just Sky but companies
could come in and effectively open access to the spectrum to sell
services. There are ways without ITV Digital to use the DTT spectrum
in a way that successful business models could be built upon.
John Thurso
189. Before asking you the main question I want
to ask, can I pay you a compliment with a consequential criticism
with regard to my constituency which is the far north of Scotland.
The compliment is that we can now all watch television quite decently
as a result of having a satellite because the terrestrial reception
is appalling. The criticism is that a number of my constituents
found it very difficult to get the free card which is required
and if there is anything you can do to make it easier for them
to get it that would be much appreciated. I want to re-visit slightly
a matter which has been brought up by others with regard to the
question of your power in the market. May I say that I have appreciated
your robust responses and the fact that you recognise that you
are in it for shareholder value and that is your role? I find
that both refreshing and honest and correct as a backdrop to understanding.
Clearly you have developed a business model from scratch, you
have every right to receive a proper return on capital for what
you have invested. There comes moments of change in exactly the
same way as, for example, Microsoft, having spent a great deal
of money creating an operating system became a dominant supplier
to the point at which they face anti-trust legislation. Looking
at the other end of the telescope from Alan Keen, it is not about
access to your platform, it is more about other people, cable
for example, having access to your channels and the cost of that.
The real question I want to ask is that if you look at that, is
there not a case eventually for separating content providers from
platform providers in largely the same way as we now accept that
tied houses should not be attached to breweries and that the business
has developed to the point at which competition demands that these
should be two separate businesses?
(Mr Ball) No, I do not agree that the two need to
be decoupled. I think there are two things which we have spoken
a fair bit about today. The fact that we have to provide our premium
services to all platforms, and it is on a rate card - whether
that rate card is disputed or not is being reviewed but we did
have to do that—plus those other channels can have access
to Sky, again on a rate card, means that we cannot use our ownership
of channels and the platform to deprive third parties of content.
We just cannot do that. I think that addresses the question of
whether we need to split these things up and make them separate.
I do not think we do. We are at a real disadvantage against other
platforms when they do go into content—and we have spoken
a fair bit today about ITV Sport. A company such as ITV Sport
can bid for rights in the knowledge that should they choose to,
whatever they spend on those rights, they can get revenues back
across the Sky platform, should they choose to put it on there,
knowing that they can clearly monetise it on their own platform.
We cannot do that. Any right we bid for, we only have the knowledge
that yes, we can get clearance on our own platform but we do not
know that we can get access either to cable or indeed to DTT.
To get back to your original point, I think it works—I would
say that—pretty well at the moment and I do not think it
has distorted the market because we are pretty heavily regulated.
We have to provide access and we have to provide content.
190. It is a "Gatesian" response but
I would not have expected any other.
(Mr Ball) Thank you. I should just like to use Microsoft
as an example. I hope I am not wrong on this but if you think
of their main product, I cannot come along with an application
and integrate it. They do not have to give me access just to integrate
it into their suite of software, whereas at Sky we have to give
that access. To compare us to Microsoft which is a fantastically
successful company is somewhat unfair because of the way we are
regulated in this market.
John Thurso: I suspect we shall come
back to this.
Chairman: John Thurso's analogy is a
very good one which has occurred to me as well. Although you are
different setups, nevertheless Microsoft were criticised in the
way that you have been criticised, namely that they have taken
enormous risks, they have innovated, they have dominated the market
and they are then criticised for exploiting their position. As
it happened in the end Microsoft won out.
Miss Kirkbride
191. I have been very much entertained by your
robust defence of your position today; it has been very refreshing
to hear how you see things. Given that most of the questions I
wanted to ask have already been asked let me ask you about the
future of public service broadcasting in Britain and your view
on it.
(Mr Ball) It has a very good future. The BBC particularly
are massively well funded. I assume it is a BBC question or is
it a general public service broadcasting question?
192. As you see it.
(Mr Ball) If you look at it on a global sense and
think of what exists in Australia, the ABC or indeed PSB in the
US, that is really about market failure. A year or so ago in this
room we were talking about the BBC and how the BBC should be funded
going forward, lots of talk about new channels to address market
failure. That is the essence of public service broadcasting; that
is what it is there for, to produce the kind of programming which
would not get made by the market and also to address areas which
would not be picked up by commercial broadcasters. In Britain
we have a whole different idea of what public service broadcasting
is. We have a massively well funded, aggressive organisation in
the BBC which does a pretty good job. I am not here to pour scorn
on them. We made a choice in England that we are going to have
the most distorted television market on the planet outside of
totalitarian states. We have this massive state broadcaster which
has funding ... Just remember that when the BBC got its last income
rise was in the climate when we were all drinking dot-com coulis,
everything was expanding and revenues were going up and the BBC
had this terrific settlement, a couple of hundred million a year
to create these channels. Everyone else is struggling, certainly
the free-to-air broadcasters and even the public service free-to-air
broadcasters because revenues are going down and it is tighter.
What does public service broadcasting mean to the BBC? I think
that in the BBC we have created a monster and it is genetically
programmed to get bigger and bigger. I am not necessarily saying
that is such a terrible thing, but when you look at what the BBC
thinks its remit is, its digital channels are a good example.
What is BBC3 all about? Fortunately the Secretary of State has
chosen to send them back to the drawing board. As I understand
it, they are creating a channel to appeal to 18 to 34 year-olds,
to be kind of edgy. Just watch television. There are plenty of
channels out there. Is that public service broadcasting? I do
not think so. Britain is never going to end up with a public service
broadcaster which is like the public service broadcasters in the
other territories I have described. We made that choice. We want
the BBC. We are special, but we need to be careful exactly what
it is going to do. What it is going to do is destroy the commercial
television world. As it gets bigger and stronger and it is massively
funded, you are going to see more and more channels disappear.
We talked about plurality. You will see arts type channels struggle
against BBC4, you will see channels such as the one we own, Sky
One, E4, struggle against BBC3 if it comes out. We just have to
be careful. We made a choice in public service broadcasting that
we want the BBC, it is special, let us just make sure we keep
it to a certain size of market. The only way we are going to do
that is to make sure it is regulated in the same way as the rest
of us are, which is why Sky would support the idea of the BBC
being within OFCOM.
193. That is pretty much my view, it has to
be said. What about the business of the BBC taking adverts? Would
you be as viscerally opposed to that as the ITV people who were
here a little earlier and Channel 5 for that matter?
(Mr Ball) We have a few years yet before the way the
BBC is funded is reviewed. I would not support the BBC taking
advertising. If the argument is that the BBC needs to take advertising
so it can continue to expand the way it has, then clearly I would
not think that was such a great idea. We need to define exactly
the remit and the limit of what the BBC does or is allowed to
do, get that in place and then address how it is funded. At the
moment it is bundled pay television. You pay the £109 whether
you listen to Radio 4 or watch BBC4 when it comes or just watch
BBC1. It is a bundle.
Chairman
194. Two things emerge from your answers to
Julie. First of all, when discussing public service broadcasting
it occurs to me that you are being far too modest, that you have
a lot of niche broadcasting like your cinema channels and your
sports channels. I would have thought that certainly the vintage
cinema channels could be classed as public service broadcasting.
Your news service is as good a news service as you can get in
this country in my view and whatever one thinks of Sky One, it
does not indulge in porn of the kind you will find on Channels
4 and 5 and if BBC are trying to compete with BBC 3, since everything
the BBC do is by definition public service broadcasting, you must
be public service broadcasting on Sky One too.
(Mr Ball) I take that as a compliment.
195. It is not a compliment. I am scared to
give you a compliment. I am just being realistic.
(Mr Ball) The nature of public service broadcasting
is a bouquet of channels such as the ones you have described that
we supply on Sky and you have to give your customers some credit.
They require programmes such as fair and unbiased news, they require
things like Sky News, they require the cinema channels which you
spoke about, they require a history channel a biography channel,
that makes the proposition attractive. Public service broadcasting
probably starts from the nanny state point of view that unless
we make sure these programmes are made people are never going
to ask for them. Yes, I agree with you that we probably do provide
a public service, especially on the news side.
196. The other point emerging from what Julie
said is that we have now had Channels 3, 4 and 5, all of whom
are scared out of their wits at the idea of advertising on the
BBC and that is why they support the existence of the licence,
not because they believe the licence is a good way of funding
the BBC but because they are scared of the alternative. When Julie
Kirkbride asked you about that, you raised a quizzical eyebrow
and moved on.
(Mr Ball) I batted the question along the lines of
what does the BBC need to be and then you can decide how it needs
to be funded once this current agreed funding round is over.
197. Somebody needs some day to make that decision,
do they not?
(Mr Ball) Indeed.
Chairman: Thank you very much Mr Ball,
Ms Cassells and Mr Gallagher.
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