Annex
1. THE EFFECTS
OF VERTICAL
INTEGRATION
Alan Keen in his questions to Mr Ball identified
a concern from a public interest and competition perspective about
BSkyB's vertical integration from content activities through to
distribution activities. The concern, put simply, is that because
BSkyB undertakes both these activities it can use its market power
in one area to undermine its competitors in the other.
BSkyB can do this in different ways. Firstly,
it can use its control over premium sports and movie programming
to give its own digital satellite platform an unfair advantage
over cable and digital terrestrial in the battle for new subscribers.
Secondly, it can use its dominant position in pay television distribution
to prevent the establishment of effective competition to its own
channels by denying potential competitors, such as ITV Sport,
viable access to satellite distribution.
Mr Ball correctly identified that there are
processes in place that seek to address these problems. The first,
the availability of premium sport and movie content to other platforms
should be regulated by the Office of Fair Trading. The second,
access for other broadcasters to the satellite platform is, in
theory, regulated by Oftel's conditional access pricing rules.
Where we disagree with Mr Ball is about the extent, nature and
current effectiveness of either of these regimes.
OFT
The OFT has never regulated the prices that
BSkyB charges cable or ITV Digital for its premium sport and movie
channels. It did obtain from BSkyB, in 1996, informal non-legally
binding undertakings in lieu of making a reference to the Monopolies
and Mergers Commission. These undertakings (1) allowed for certain
information to be provided to the OFT and (2) gave some guidance
on the structure of BSkyB's prices. Subsequently, the OFT announced
in December 2001 that it is minded to find that BSkyB has breached
the Competition Act in relation to its pricing of premium channels
to both cable operators and ITV Digital. This confirms that the
undertakings did not regulate the level of BSkyB's prices as Mr
Ball appeared to have suggested to the Committee.
OFTEL
Mr Ball said that the conditional access (CA)
ratecard is regulated by Oftel. In our own discussions with Oftel
they have denied this—rather they have said that only in
the event of a complaint could they intervene in BSkyB's pricing.
Oftel have not yet published any information about BSkyB's underlying
CA costs or made any assessment of whether those costs are reasonable.
Oftel is currently in the process of reviewing its guidelines
in this area and will then have to settle ITV1's complaint—for
the first time therefore it will be necessary to go through BSkyB's
claimed CA costs. This would suggest that BSkyB has not, to date,
been regulated as tightly by Oftel as Mr Ball claims.
In our detailed response to Oftel's recent consultation
on its CA Guidelines we identified a number of ways in which we
believe BSkyB's current ratecard is designed to favour its own
channels. For example, it imposes a price on potential providers
of an alternative premium sports package (such as ITV Sport) equivalent
to that paid by the entire BSkyB package of over 150 channels
(£2.50 per month per subscriber). Accordingly, it is currently
uneconomic for ITV Sport to use the conditional access route (as
Mr Ball has suggested is possible) as, at ratecard levels, around
42 per cent of any customer revenues would have to be paid to
BSkyB in CA fees before any other costs could be met.
We would also direct the Select Committee's
attention to the comments submitted to Oftel by MGt Plc. MGt refers
in its submission to a consultation it pursued amongst its own
clients, which represent the majority of independent pay TV broadcasters
currently using the UK's digital satellite platform. At page 2
of their submission, MGt state:
"In responding to Oftel's document, we first
challenge the stated opinion that the regulation of CA pricing
to date `has been successful in attracting a large range of content
for the consumer'.
This is quite simply not the case. Oftel's published
aim in seeing that consumer choice and competition are maximised
is not being realised under the existing regime. In the three
and a half years since the launch of Sky Digital, neither competition
nor choice have materialised in the content areas that are most
important to the dominant broadcaster on Digital Satellite (BSkyB),
namely sport and movies. There remains, for instance, absolutely
no effective competition for BSkyB's own Sky Sports channel packages,
and in movies competition is limited to Film Four."
Effectively, the BSkyB wholesale ratecard for
conditional access charges has erected an insurmountable barrier
for anyone seeking to compete with BSkyB's core monopoly businesses
in premium sport and premium movies. We believe that this is the
precise intention of BSkyB's strategy. The claim that BSkyB's
platform is, in any meaningful sense, "open" is simply
inaccurate.
To summarise, Mr Ball suggested that because
of the existence of the OFT and Oftel regulatory regimes, the
Select Committee need not be concerned with BSkyB's market power.
However, prior to December 2001, interventions by the OFT and
Oftel failed to adequately address the problems of vertical integration
in pay television broadcasting. As a result, BSkyB has been able
to exercise market power largely unrestrained by concerns over
the legality of its behaviour or the threat of competitive entry.
This has left prices for pay TV artificially high and choice and
competition artificially limited. Although we look forward to
the resolution of the OFT's investigation and revised Oftel guidelines,
we believe that the key points for the Committee to take note
of are:
— the time that it has taken for these
issues to be properly addressed;
— the confusion and lack of transparency
which BSkyB has benefited from; and
— the relatively limited resources
of the regulators compared to those of BSkyB.
All of these matters may be something which
the Committee may properly wish to comment on in its report.
2. COMMERCIAL
NEGOTIATIONS FOR
ITV SPORT CHANNEL
Mr Ball claimed in his oral evidence that BSkyB
had reached a deal with ITV for carriage of ITV Sport on the satellite
platform and that ITV had "changed their mind at the last
minute". This is simply not true.
Mr Ball is correct, however, in stating that
ITV has sought a minimum guarantee from BSkyB in relation to the
carriage of ITV Sport should it license ITV Sport to BSkyB for
inclusion within its retail package. BSkyB would have much to
gain from the failure of ITV Sport. As ITV's principal competitor
in the provision of premium sports programming it would have every
incentive and ability to restrict the availability and limit the
marketing of ITV Sport to potential satellite customers. We believe
that the only way that we can ensure a reasonable chance of success
for ITV Sport is for BSkyB to be sufficiently incentivised to
sell ITV Sport against its own premium sports programming. This
can only be achieved by agreeing a minimum guarantee at the outset.
3. CHANNEL HOLDBACKS
Mr Ball said that the ITV Digital shareholders
had taken the strategic decision to "pepper" DTT's limited
spectrum resource with their own channels instead of signing up
channels that were attractive but more expensive.
This is an inaccurate description of what actually
happened at the time of DTT launch in the UK. When BSkyB was ejected
from the BDB consortium, we believe it ensured that many of the
significant basic channel providers entered into restrictive (and
arguably illegal) agreements which prevented those channel providers
offering their channels to DTT.
For example, BSkyB entered into agreements with
Discovery Communications Europe preventing the carriage of the
Discovery Channel on digital terrestrial until 2006 at the earliest.
In 2001, more information became available about these agreements
(which had been filed at the OFT) and ITV Digital made a formal
complaint to the European Commission in the summer of that year.
Following the Commission's preliminary investigation
BSkyB agreed (on a without prejudice basis) to renegotiate the
restrictive arrangements that it had entered into. As a result,
ITV Digital was finally able to launch the Discovery Channel on
DTT in November of 2001. Discovery is one of the most popular
basic channels in the UK and the lack of that channel put ITV
Digital at a serious disadvantage when competing for new subscribers
against Sky's own digital offering.
BSkyB had, we believe, intentionally sought
to undermine ITV Digital as a potential new competitor to satellite
by denying it access to attractive content provided by third parties.
This strategy was most effective during the first two crucial
years of ITV Digital's life when many BSkyB subscribers were upgrading
from analogue to digital and may have considered an alternative
platform. The European Commission's investigation is ongoing.
4. CARRIAGE OF
ITV1 ON SATELLITE/MUST
CARRY
ITV maintains that the principal beneficiary
of carriage of ITV1 on satellite is BSkyB and that therefore,
in a competitive market, no payment would be due to BSkyB (in
fact the reverse might be true as occurs in other countries).
This is why we refused to pay the CA charges demanded by BSkyB
and have asked Oftel to settle this disagreement. Oftel acknowledges
that the value of the public service channels to pay television
operators such as cable operators is significant.
"3.25 It has to be noted, however, that
there is a benefit to the cable operator in the carriage of `must
carry' channels. These have some of the highest viewing by consumers
and there is a high level of consumer expectation that such channels
will be available. It is possible that without the `must carry'
arrangements platform operators would have to pay a considerable
amount to public service broadcasters for these channels."
The satellite platform benefits from carrying
the public service channels in the same way as cable. Despite
this, under the current regime BSkyB was able to demand some £17
million pounds per annum for carriage of ITV1. At no stage has
BSkyB provided any information on how this ratecard price has
been derived, nor is it in any way related to the incremental
direct costs of providing the CA services, which we estimate to
be less than £100,000. This £17 million therefore constitutes
almost pure profit for BSkyB, yet it has not been able to provide
any reasoned argument why public service broadcasters should cross-subsidise
BSkyB's platform when it is perfectly capable of recovering these
costs from its own subscribers activities. Neither cable nor digital
terrestrial benefits from a similar cross-subsidy.
This is why we continue to believe that the
only platform neutral way of achieving the Government's public
policy objective of universal access to public service channels
is to replicate the White Paper's proposals for must carry on
cable networks as closely as possible on the satellite platform.
5. THE "DIGITAL
DIVIDEND"
BSkyB has argued that it should be entitled
to charge ITV CA charges which take into account the "digital
dividend" received by ITV. As we have made clear to Oftel
in ITV's submission on conditional access, the "digital dividend"
is a reduction in ITV's payments for analogue spectrum to reflect
the reducing value of that spectrum as homes migrate to multi-channel
viewing and the consequent reduction in advertising revenue received
by ITV. It was not intended as a subsidy for the already dominant
pay television operator, BSkyB as confirmed by the ITC's evidence
to Oftel.
6. BSKYB AND
"PLATFORM NEUTRALITY"
BSkyB makes much of encouraging "platform
neutrality" by the Government. However, its own behaviour
as the dominant provider of premium programming for pay television
has, in our view, been anything but "platform neutral".
For example:
(a) The core abuse identified by the OFT
in December last year (the "margin squeeze") is that
BSkyB has charged ITV Digital and the cable operators much higher
prices for premium programming than it charges its own distribution
business. This has the effect of artificially favouring the satellite
platform over other platforms.
(b) Similarly BSkyB's charges for CA oblige
public service broadcasters to subsidise Sky's platform when no
similar subsidy is given to cable or DTT. The BBC's evidence to
Oftel states as follows:
"S6. Public Service Broadcasters (PSBs)
are effectively subsidising the rollout of Sky Digital boxes,
whilst other platforms (digital cable and digital terrestrial)
receive no such subsidy. This is caused by the fact that of the
three digital television platforms, only the satellite platform
requires a conditional access system for public service broadcasters.
BSkyB charges more than incremental cost for this service, thereby
enabling it to support its subsidy of the rollout of Sky Digital
boxes. PSBs have no control over the decision to subsidise boxes
on any of the three digital platforms and it is quite wrong to
require them to contribute to STB box costs on one platform."
BSkyB therefore both prefers its own business
and seeks to ensure that Government policy fails to reflect the
genuine technical differences between platforms—issues which
do justify different treatment (see below).
7. THE EFFICIENCY
OF THE
DTT PLATFORM
Mr Ball questioned the viability of DTT and
claimed that it had "got off to a pretty bad start everywhere".
In the UK, the DTT platform has grown from scratch
faster than any multi-channel platform in the world, with ITV
Digital acquiring its millionth customer faster than any of its
rivals and faster than Orange or Vodafone. In the EU, every country
bar Luxembourg has already introduced, or plans to introduce,
DTT. One only has to consider how many households in Europe still
rely entirely on terrestrial reception—over 50 per cent
or some 75 million—to understand DTT's potential.
One of the key advantages DTT has over other
delivery platforms is cost. For example, if the UK Government's
policy is to replicate in digital the current universal availability
of analogue terrestrial television, then DTT is by far the cheapest
way to do so. Digital satellite and cable are inherently more
expensive technologies.
In November 2001 ITV commissioned independent
research to estimate the costs of achieving near universality
of digital reception with a combination of different platforms:
— current DTT power levels/cable/satellite;
and
— higher DTT power levels/cable/satellite.
The estimated costs of 1) meeting the Government's
switchover target of 95 per cent of the population with access
to digital television through one of their TV sets and 2) all
sets being converted to digital, were as follows:
| Scenario | Capital
(£ million)
| Recurring pa
(£ million)
| Annualised
(£ million)*
|
| 95 per cent access, cable/satellite ONLY |
1,544 | N/A
| 308.0 |
| ONE TV SET ONLY |
| 95 per cent access, cable/satellite/current DTT
| 1,050 | N/A
| 210.0 |
| ONE TV SET ONLY |
| Quasi-universal digital service (95 per cent) cable/satellite ONLY
| 7,822 | 2,400
| 3,964.0 |
| ALL SETS |
| Quasi-universal digital service (95 per cent) cable/satellite/current DTT
| 4,614 | N/A
| 923.0 |
| ALL SETS |
| Universal digital service (99 per cent) cable/satellite/higher power and coverage DTT
| 3,940 | N/A
| 788.0 |
| ALL SETS |
| * Amortised over five-year conversion period.
|
The research concluded that using DTT to deliver the public
objective of universal coverage of digital television would cost
less than one quarter the cost of delivering the same objective
using cable and satellite alone. Furthermore, only DTT will be
able to offer mobile and portable reception of digital television.
A truly platform neutral policy should not ignore the genuine
technological advantages of DTT and what DTT can uniquely offer
in the public interest compared with other distribution mechanisms.
| 
