Examination of Witnesses (Questions 447-459)
BSKYB
8 MAY 2007
Q447 Chairman: Could I welcome the representatives
of Sky for our next session: Mike Darcey, Chief Operating Officer;
Graham McWilliam, Head of Corporate Communications; and Martin
le Jeune, Head of Public Affairs. Mike, we are disappointed you
have not come with props this time!
Mr Darcey: I have not come with
props; I have brought an analogy instead to try and entertain
you.
Q448 Chairman: I know you would like
to make a short opening statement, so please go ahead.
Mr Darcey: Thank you, Chairman.
We at Sky welcome the Committee's interest in public service content,
and we do so because we believe that the area is subject to a
great deal of unwarranted hand-wringing, with many commentators
taking what we would regard as an unhelpfully narrow view of the
issues. Put simply, the coming of age of the multi- channel sector
and now the growth of high speed broadband internet access means
there is already more content with public service characteristics
available to more people than ever before, and there is a lot
more to come. Sky itself is very proud that it has led and enabled
the expansion in choice and diversity of use available to British
viewers. The number of TV channels has grown from four when Sky
launched in 1989 to around 400 today; that includes 14 news channels;
26 children's channels; over 40 channels catering to foreign and
ethnic interests; and more than a dozen dedicated to religion.
We have transformed the way that sport and news are covered on
television in the UK, raising standards across the board, which
others have sought to imitate. We invest hundreds of millions
of pounds a year on screen, including in genres traditionally
thought to be the preserve of public sector broadcasting—including
original drama, arts programming and, of course, news. We do this
without a penny of public subsidy, and with no licence obligation
to do so. The contribution from Sky from the wider multi-channel
sector, and from the wider internet, as it stands today and as
it can be expected to develop going forward, we think should be
the starting point for a discussion about the future of public
service content. This contribution should be seen as to create
a strong presumption that further public intervention is not necessary.
Ofcom we think should look at outputs; that is the quality and
diversity of content actually available to viewers across the
board; but so far Ofcom has tended to focus on inputs and this
leads them to fret that the amount of public subsidy is in decline,
and to contrive solutions, such as the PSP, to problems that do
not actually appear to exist. For me it brings to mind an analogy
with the selection of the English cricket team. The position adopted
by Ofcom appears to us to be the equivalent of continuing today
to select players like David Gower and Ian Botham. They were great
players in their time, but when you have promising youngsters
like Alastair Cook and Monty Panesar on the scene most agree that
you have to look to the future and give them a run in the team
even though they do not yet have that same test pedigree. We at
Sky would like to see Ofcom show a little bit more faith in the
up-and-coming multi-channel sector; make a bit of room for us
in the team; and spend a little less time trying to shore up some
of the old-timers. Perhaps they should even think about the Internet,
as the brilliant 17-year-old in India would be selected today
and, after a slightly rocky start, would blossom into the next
Sachin Tendulkar, but we are rarely that bold in England.
Chairman: Thank you. Thought for the
day!
Q449 Philip Davies: Both Ofcom and
the OFT believe that your purchase of a stake in ITV should be
referred to the Competition Commission. In fact, the Chief Executive
of the OFT said that "Sky's shareholding means that ITV is
no longer fully independent". How do you respond to the view
that your purchase is reducing media plurality?
Mr Darcey: We do not agree, obviously,
with the finding and the recommendation that the OFT has made.
Where we are at the moment, just to be clear, is that the OFT
and Ofcom have made a recommendation and that now sits with the
DTI, and we await the DTI's conclusion on that. We hope to have
things to say to the DTI, and if we ultimately end up at the Competition
Commission we will have quite a lot to say there as well.
Q450 Philip Davies: Greg Dyke just
said that it was pretty obvious that your purchase of the stake
in ITV was simply to prevent any possibility of Virgin buying
ITV. Is that true, or not?
Mr Darcey: It is certainly true
that Greg Dyke said it, and I have heard many people say that
and I have read that in most newspapers; but not many of those
people were in the room when we took the decision to do what we
did. The reality is that ITV is an extremely attractive asset.
On a European scale it is almost unique in terms of its position
as a broadcaster and as a producer of content. It is an extremely
attractive asset that for many years had been managed very poorly.
I think Greg also mentioned that it did not really have very much
of strategy for five years. At the time it did not really have
a chief executive; and it had somewhat lost its way. It is a situation
that we had been watching for many years; and we had often wondered
(given that we had confidence that eventually they would get leadership
sorted out and they would eventually get a strategy and there
would be a turnaround) whether that might be something we might
participate in financially but we never really did anything about
it. I guess to some degree it is true that the events leading
up to our move in the market did trigger our move. There were
substantial rumours around that Virgin was having a look at it.
There were also rumours around that RTL was planning a bid, and
several private equity groups had certainly looked at it in the
past; and we rather expected that if anything started they too
would come out of the woodwork. I think people were expecting
Virgin to start things. I think it was far from clear that if
something kicked off Virgin would actually end up with the asset.
Our motivation was really not so much that it might end up with
Virgin but that it might end up somewhere; and if it disappeared,
either into the hands of Virgin, or into the hands of RTL, or
private equity, then we thought that whoever it was was going
to do very well because it appeared ITV was at a low ebb, it would
turnaround and somebody would do well out of that. We thought
to ourselves, "Well, if somebody's going to do this, if we
have confidence it will turnaround, it's time to either do something
to reflect that view or stand and watch it happen". We took
the view that we would like to participate.
Q451 Philip Davies: You were concerned
that it would become a fierce competitor and you did not want
it to be a fierce competitor with it not in your ownership?
Mr Darcey: No, that is not what
I said at all. I do not think it would become a fierce competitor,
just that there would be a financial turnaround at that company
and that was something we would like to participate in. That is
why we made the move we did.
Q452 Philip Davies: How much involvement
do you plan to have in ITV? Are you going to have a seat on the
board? How much involvement are you going to have in their decision-making?
Mr Darcey: We are not going to
have any involvement at all. We do not have a seat on the board.
We had not sought a seat on the board. Our intention is simply
to be a supportive shareholder, but in a passive way. It is for
the board to do what they have done, and we are very happy that
they have appointed new management and they are getting on with
things, and things seem to be moving broadly in the right direction.
It is up to management to set the strategy of the company in the
end; and it is up to the board to hold management to account and
we are simply a shareholder.
Q453 Philip Davies: If the ITV Board
decided to do something, such as a rights issue, an acquisition
or a disposal, you would happily go along with whatever decision
they made and you would not ever seek to block any proposal that
they made?
Mr Darcey: I do not think we have
got an ability to block anything. Obviously if there are matters
that come to a vote of shareholders then we would look to vote
our shares. I think we will look to our interests as shareholders
as all other shareholders would do.
Q454 Janet Anderson: You have taken
your channels off Virgin and you propose to start charging a subscription
for your channels on Freeview. How would you respond to criticism
that what you are doing is attempting to stifle other platforms?
Mr Darcey: I guess I have to take
issue with a number of steps of the question. We have not taken
our channels off Virgin. What we have is a situation where Virgin
operates a closed platform and is able to deny carriage to channel
providers if it chooses to do so. That gives it a very strong
position in negotiation. We have invested very considerable amounts
in our portfolio of entertainment channels over the last few years;
that amount has increased 68% over the last five years or so;
because we believe it is important to continue to invest in content.
I think the broad situation we are in is, having invested a great
deal in content, we are hoping to be able to conclude a carriage
agreement which reflects that investment. I think we have somewhat
clashed with the fact that Virgin is in a position with a closed
network and it is trying to get its content costs down and it,
at the moment, is saying it is not willing to pay what we think
is a reasonable rate. I know some people have sought to characterise
it as we have withdrawn our channels from Virgin; I think we choose
to characterise it as they have denied us distribution.
Q455 Janet Anderson: Are negotiations
continuing?
Mr Darcey: Our last offer remains
on the table, and we are very keen to secure carriage and we are
available to continue negotiations. There is not a lot of direct
activity at the moment. Most of Virgin's activity just at the
moment seems to be directed at court actions and regulatory attack.
They seem less inclined to devote time to getting round a table,
but if they are willing to do so then I am very keen.
Q456 Janet Anderson: You think a
deal could be possible?
Mr Darcey: I hope so. That is
very much our preferred outcome; that we get back on that platform
and get back to having our channels in those 3.3 million homes.
It is a very substantial commercial opportunity that we would
rather not be doing without in the long-run. When they are willing
to have a conversation then we would like to do that.
Q457 Chairman: Could I just ask you
about your plans for Freeview. You are intending to turn the channels
you have on Freeview into subscription channels; my understanding
is that you will require subscribers to have set-top boxes with
proprietary conditional access systems within them, and that those
conditional access systems will not be available should your customers
also want, for instance, to view Setanta channels. Is that not
a restriction of competition?
Mr Darcey: I should probably lay
out what we have said. The position is that we have taken the
view that the best use of our DTT capacity that we have access
to is not to offer a series of channels free-to-air, but instead
to move to a pay service over DTT. The plan we think is very enhancing
of choice and will provide a new option on the DTT platform. We
plan to offer sports, including Premier League content, movies,
Sky One and Sky News and these sorts of channels.
When you are thinking about a channel like Sky Sports and
Premier League content where we, for example, recently concluded
a deal at around £1.3 billion for the next Premier League
contract, we are talking about very expensive premium content;
and in that environment you have to be very careful about the
security of that content. It is a very important part of your
pay subscription operation on satellite, and it would be on DTT.
You must have great confidence in the security of that; that it
cannot be had. We prefer, as we have always done, to use conditional
access technology provided by NDS, which I think around the world
has shown itself over many years to be by far the most secure,
and most other systems have had problems at various times. That
is what we want to do to ensure the integrity of our content.
The next step in your argument, however, I think is not correct.
Of course it would be open for Setanta also to use the same encryption
technology. If they wanted to come and do so we would be happy
to make that available to them and to retail them over that same
box. There are in fact many other options available to them. They
have chosen a different conditional access technology. I think
the key part of what we are doing is that we are not proposing
to specify entirely a Sky box that has only NDS conditional access
in it; rather what we are doing is taking the horizontal market
approach that has characterised the DTT platform saying that these
are the components that need to be in a box in order to receive
the services that we want to put out there; and while we will
initially work with one or two manufacturers to get the market
going, we will then be opening things up and any manufacturer
will be clear to build whatever box they like. The key thing there
is that if there is consumer demand for a household that wants
to take Sky services over DTT, and Setanta's services over DTT,
then the manufacturer is free to build a set-top box with both
conditional access systems in it and then that customer will be
able to receive both.
Q458 Chairman: You would be happy
to make available the NDS conditional access system to any manufacturer
even if they were going to also incorporate Setanta?
Mr Darcey: We are not proposing
to place any restrictions on what manufacturers build. We will
say, "This is what needs to happen for the security and the
reception of our content. If you want to go and build it into
a toaster, you can do so. If you want to build it with a DVD recorder,
you can do so. If you want to build it with Nagra CA for the reception
of Setanta channels then you can do that. If you think there is
a market demand for it then go ahead".
Q459 Mr Evans: How many subscribers
have you got?
Mr Darcey: How many subscribers?
Mr McWilliam: Just under eight
and a half million in the UK and Ireland.
Mr Darcey: The exact number that
we quoted last week was 8.4.
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