Select Committee on Culture, Media and Sport Appendices to the Minutes of Evidence



  At the Culture Media and Sport Committee hearing on 29 January 2002, a number of questions were asked about regulation of conditional access ("CA") services.

  In the circumstances, it appears appropriate for Sky to describe in this Supplementary Memorandum:

    —  the success of regulated access to the digital satellite platform ("DSat") to date;

    —  the way in which Sky approaches the negotiation of CA charges; and

    —  the withholding of ITV Sport from DSat.

  1.  Access to the digital satellite platform

  1.1  The rules that govern access to DSat derive from Article 4(c) of European Directive 95/47/EC which states:

    "Member States shall take all the necessary measures to ensure that the operators of conditional access services . . . offer to all broadcasters, on a fair, reasonable and non-discriminatory basis, technical services enabling the broadcasters' digitally-transmitted services to be received by viewers . . ."

  1.2  This obligation is now enshrined in UK secondary legislation, The Advanced Television Services Regulations 1996—Statutory Instrument No. 3151, and the Class Licence for CA Services, which was initially issued by the DTI on 7 January 1997 and reissued in a slightly modified form on 1 August 2001.

  1.3  The regulatory regime, which Oftel has established in order to implement the Statutory Instrument and Class Licence, seeks to encourage commercial negotiations for the provision of CA services within the framework set out in Oftel's guidelines.[21]

  1.4  To date, Sky (via BSkyB and its subsidiary, SSSL, as appropriate) has successfully negotiated in excess of 185 agreements within the framework that Oftel has established without the need for any formal intervention by Oftel[22]. Oftel has acknowledged that, as at 30 October 2001:—

    "As a possible indicator of the effectiveness of the current regime, Oftel has not received any formal complaints concerning the pricing of conditional access services."[23]

  1.5  In addition, Oftel has acknowledged that:—

    " . . . [it could] also act under the Competition Act if there were reasonable grounds for believing that a conditional access operator who has a dominant position in the relevant market was breaching the prohibition on the abuse of dominance. To date, no evidence of such an abuse has become available."[24]

  1.6  The absence of formal complaints and any evidence of abuse (together with the successful negotiation of more than 185 agreements) is a clear testament to the current regime.

  1.7  A further indicator of the effectiveness of the current regime is the fact that it has enabled the introduction of innovative charging mechanisms. These mechanisms include the development of fixed annual charges, charges tailored for niche channels and specific distinctions between pay per view services.

  1.8  The effectiveness of the current regime is not diminished by the formal complaint about Sky's CA charges for ITV1 which ITV lodged after Oftel made these statements.[25] The fact that Oftel is currently investigating ITV's complaint merely confirms that its regime is capable of dealing with a situation in which a broadcaster considers that the terms it has been offered for CA services are unfair, unreasonable or discriminatory.

  2.  Negotiation of CA charges

  2.1  Sky describes below the process of negotiation that takes place with prospective CA customers.

  2.2  Pursuant to Oftel's regime, Sky publishes indicative CA charges which are expressly stated to be:

    ". . . its starting point for negotiations."

  2.3  Accordingly, although these published charges are euphemistically referred to as a "rate card", they do not constitute a rigid tariff structure. Sky's CA charges are modified, during the negotiation process, to address particular circumstances as appropriate.

  2.4  By way of clarification, Sky confirms that Oftel has not, in general, expressly approved its published indicative CA charges. Oftel has, however, over a period of more than three years, been provided with copies of all Sky's published indicative CA charges and comprehensive information about the costs which give rise to those charges. At no stage has Oftel objected to any of Sky's published indicative CA charges. Furthermore, it should be noted that the process by which Sky's CA charges recover BiB's set top box subsidy was formally notified to Oftel in accordance with Condition 7(B)(iii) of the European Commission's decision of 15 September 1999 in respect of BiB (Case Number IV/36.539).

  2.5  When first approached by prospective purchasers of Sky's CA services, it is clear that some are prepared to pay Sky's published indicative charges without further negotiation. In this regard, Sky notes Oftel's confirmation that:

    "The economically efficient way of pricing in markets such as that for conditional access is likely to be to charge higher prices to customers (broadcasters) who attach a greater value to conditional access—ie they have a greater willingness to pay."[26]

  2.6  If a broadcaster chooses not to negotiate the initial level of charges proposed by Sky, the broadcaster is demonstrating a greater willingness to pay than those who wish to negotiate and, as Oftel suggests, it is economically efficient for Sky to proceed with charges at that level.

  2.7  In other cases, however, negotiation is required for a variety of reasons, the most important of which are:—

    —  the broadcaster wishes Sky to provide bespoke CA services, or include new terms and conditions in a CA contract[27];

    —  the broadcaster wishes to share the risk of the development of its service with Sky; and

    —  the broadcaster considers that Sky's published indicative charges preclude it from broadcasting its service economically on the DSat platform.

  2.8  In practice, negotiation involves Sky being asked to reduce its charges. Accordingly, the indicative charges represent the highest charges that Sky hopes to be able to negotiate. It should be noted, however, that not all customers are equally competent when negotiating. If some customers are less competent than others, then they are, of course, not automatically afforded the same concessions.

  2.9  When a broadcaster actively enters into negotiations, Sky will attempt to develop a contract for the provision CA services that:

    (a)  meets the broadcaster's requirements and enables it to operate economically on the platform;

    (b)  provides a fair and reasonable contribution to the costs of developing and operating the DSat platform; and

    (c)  would not result in a significant adverse effect on competition between the particular broadcaster and other broadcasters.

  2.10  Achieving (a) involves an assessment by Sky of the economics of the broadcaster's proposed service in relation to its distribution to DSat households. This may be done either in conjunction with the prospective customer in question, where that customer is prepared to discuss relevant data with Sky, or, more frequently, it is based on Sky's own assessment of broad details about the service which are provided by the prospective customer. A common understanding of the economics of a prospective service is then developed through further discussion between the prospective customer and Sky.

  2.11  Bespoke deals include a negotiation of many factors in addition to the charges. Agreements are considered in the round and the charges that are eventually agreed take account of customer specific factors including risk, term, service levels, service credits, technical complexity, renewal rights.

  2.12  Furthermore, the economics of a prospective service depend on the potential costs and revenues of providing the service on DSat. Key drivers for these variables may include:

    —  whether the service will be provided only on DSat or on a variety of platforms;

    —  the type of service (eg one "niche" film channel, a package of subscription channels, pay per view service, free to air service etc);

    —  retail prices;

    —  advertising revenues;

    —  marketing and cross promotional activities which benefit the platform;

    —  the ability to attract subscribers who could subsequently benefit other DSat broadcasters and the platform as a whole;

    —  total number of DSat households;

    —  "take-up" rates (eg subscribers, "buy-rates" (for pay per view services), "reach");

    —  other revenues generated, or costs saved, as a result of broadcasting on DSat[28];

    —  transponder, uplink and transmission costs;

    —  customer management service charges;

    —  incremental rights charges; and

    —  incremental marketing costs.

  2.13  Sky seeks to assess the net incremental contribution of providing a service on DSat to a broadcaster's fixed and overhead costs over a reasonable time horizon (eg three to five years). Sky might also seek to identify the costs and revenues that a "typical" operator of a service of the type proposed would incur and earn, rather than the costs and revenues that the specific operator considers are appropriate. The reason for this is as follows: whilst Sky negotiates CA charges in such a way as to avoid creating unjustified barriers to entry[29], its CA charges cannot be regarded as the balancing factor in a broadcaster's profit and loss account—Sky does not have to reduce the level of its CA charges in order to compensate a broadcaster for its inefficiency or any other extraneous factors.

  2.14  Overall, this rigorous process of analysis and negotiation enables Sky to gain a good appreciation of each broadcaster's "willingness to pay"[30]. Thus, this process leads to an economically efficient way of pricing Sky's CA services[31].

  3.  ITV Sport

  3.1  At the Culture, Media and Sport Committee hearing on 29 January 2002, the representatives of ITV were asked about the non-availability of ITV Sport on DSat. It may be helpful if we correct the misimpression that could result from ITV's answers.

  3.2  During the hearing Mr Prebble specifically stated on behalf of ITV that:

    "Unfortunately we have not been able to reach satisfactory commercial terms for distributing the ITV Sport channel, which now contains . . . rights to Champions League, to Sky subscribers. . . . There have been good faith commercial negotiations on our side, but we are a very long way from reaching a commercial agreement.". . .

    "The fact that the Football League rights were available to Sky viewers when they were owned by Sky but are not available to Sky viewers now that they are owned by a competitor is obviously in our view anti-competitive."

  3.3  As far as the allegedly good faith commercial negotiations on ITV's part are concerned, the Committee should note:

    (i)  As is explained in sections 1 and 2 above, DSat is an open platform and, thus, Sky cannot deny ITV Sport access to that platform.

    (ii)  In respect of ITV1, ITV negotiated the best CA deal it could with SSSL, entered into an agreement, launched ITV1 on DSat and simultaneously complained to Oftel about SSSL's charges. Oftel is currently considering that complaint.

    (iii)  On 13 December 2001, ITV wrote to SSSL on the subject of CA services for ITV Sport and stated:—

    ". . . it is likely . . . that we will want to make a complaint to Oftel. . . . we would propose to continue with the process of agreeing the terms for the provision of CA services for ITV Sport and to have the CA services provided at the current ratecard price (or any improved price Sky is prepared to offer) pending the outcome of the Oftel determination. At this point the new price would apply".

    (iv)  It is clear, therefore, that as with ITV1, ITV could negotiate the provision of CA services for ITV Sport, enter into an agreement in due course and make the channel available on DSat whilst still seeking improved terms through regulatory intervention. There is, therefore, no impediment to ITV Sport being launched on DSat.

    (v)  Yet, on 14 January 2002, ITV indefinitely postponed the negotiation meeting that was due to take place on 15 January 2002, thereby demonstrating that it is continuing to withhold the channel from DSat[32].

  3.4  In practice, there have been many instances when ITV executives have confirmed that their policy is to withhold ITV Sport from DSat viewers. For example:

    —  in Mediaweek on 25 June 2001, Mr Murphy, the Chief Executive of Carlton, confirmed that the policy of ITV Digital (the digital terrestrial pay television platform) was to have more live football than any other platform as a result of its exclusive distribution of the ITV Sport channel;

    —  the same message was conveyed by Mr Prebble, the Chief Executive of ITV, in an interview in Sunday Business on 30 September 2001;

    —  Mr Fyfe, the Chief Operating Officer of ITV Digital, confirmed in an interview in the Daily Mail on 26 July 2001 that he had been fighting long and hard to keep the ITV Sport channel exclusive to ITV Digital; and

    —  the Financial Times on 16 January 2002 reported: "Some ITV executives, led by chief executive Stuart Prebble, are thought to be reluctant to share the content with BSkyB, as they see it as key to attracting new [digital terrestrial] subscribers." The same article quoted an ITV executive stating: "There are some people at ITV Digital who have the mistaken belief that it is in the company's interest to see talks [with Sky] break down".

  3.5  In the circumstances, it is clear that, contrary to Mr Prebble's evidence cited in paragraph 3.2 above, Sky is not anti-competitively denying ITV Sport access to DSat viewers.

February 2002

21   Para S3 of Oftel's Consultation Document entitled "The pricing of conditional access services and related issues" dated 30.10.01 (the "Consultation Document"). Back

22   These agreements to which SSSL is a party are not all for CA services but also address services in respect of application signing and authentication. BskyB is a party to agreements for EPG services. Back

23   Para 1.16 of the Consultation Document. Since this statement, ITV has formally complained over SSSL's CA charges for ITV1. Back

24   Para 1.9 ibid. Back

25   IVT1 launched on Dsat in November 2001, reversing ITV's longstanding strategy of withholding the channel from the platform in order to boost the take up of Ondigital (now ITVDigital), the pay TV operator jointly by Carlton and Granada. This strategy - and the "digital dividend" that ITV acknowledged was immediately gained from the launch of ITV1 on Dsat - are discussed in Sky's January 2002 Memorandum to the Committee. Back

26   Para 2.2 ibid. Back

27   Sky has been encouraged to adopt a flexible approach to CA pricing rather than stick to a rigid tariff structure - by definition, a bespoke arrangement means something that differs from other arrangements due presumably to dissimilar circumstances. Negotiations tend to commence with a discussion of comparable prices and quickly move to Sky being asked to offer something bespoke, ie specific to that customer. Back

28   Sky does not include revenues from interactive services associated with a channel in this category, as these would be subject to access control charges. Back

29   See para 1.6 of the Consultation Document. If a broadcaster is unwilling to pay the CA charges that could be paid by a typical operator of the service in question, by proposing CA charges at that level Sky has not created an unjustified barrier to entry. Back

30   Sky does not, however, seek to extract all of this willingness to pay. Instead, Sky seeks a "fair and reasonable" share of this incremental value being generated by particular broadcasters making their services available on Dsat. It should be noted, that the intense competition between digital TV distribution platforms and the ability of broadcasters to threaten to be platform exclusive against Dsat are material constraints in this regard. Back

31   See para 2.2 of the Consultation Document. Back

32   Prior to this, ITV met with Sky on only two occasions to discuss CA charges for ITV Sport (18.12.01 and 8.1.02). In the first meeting, ITV acknowledged that it had not come prepared to negotiate. Back

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