Annex
REGULATION OF CONDITIONAL ACCESS SERVICES
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);
— 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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