Supplementary memorandum submitted by
At Sky's oral evidence session on 24 June 2002,
a number of questions were asked about issues on which it appears
appropriate for Sky to offer supplementary comments. These issues
third party channels; and
1. CROSS MEDIA
At Sky's oral evidence session, Mr Farrelly
asked whether the Government should be consistent in its approach
to cross media ownership of Channel 3 and Channel 5.
Sky believes that the existing cross media ownership
rules in their entirety are outdated, arbitrary and discriminatory.
As Sky noted in its Memorandum to the Joint Committee, issues
of ownership and mergers are already subject to competition law
approvals and ex ante sector specific rules are unnecessary in
relation to ownership of both Channel 3 and Channel 5. Furthermore,
impartiality requirements remain in the draft Bill to preclude
any possibility of proprietor influence over editorial content.
However, Sky does not support an "all or
nothing" approach to deregulation. The removal of the cross
ownership rules on Channel 5 is sensible even if the Channel 3
anomaly were to remain. Two wrongs do not make a right and it
would be nonsensical to reintroduce restrictions on ownership
of Channel 5 simply to achieve consistency.
Sky notes that fears have been expressed that
somehow ituniquelycould in future purchase Channel
5 and "turn it into ITV". The idea that Sky, but not
AOL/Time Warner or Bertelsmann, could achieve this borders on
anti-Sky hysteria. In any event, Channel 5 is a non-universally
received channel with a programming budget which, even if doubled
or trebled, would remain only a fraction of ITV's. Channel 5's
share of television advertising revenue would also remain only
a fraction of that of ITV, even if doubled or trebled.
Furthermore, there are no rational grounds for
attempting to bar any potential Channel 5 owner on the basis that
it might make the service "too successful"particularly
given the Government's overall aims to open up the industry to
additional sources of capital and expertise, in order to "make
sure that the UK is home to the most dynamic and competitive communications
market in the world".
Joint Committee members mentioned the issue
of "dominance" a number of times in Sky's oral evidence
session. For instance:
Baroness Cohen of Pimlico asked whether
Sky would prefer to leave platform ownership regulation to OFCOM,
"Given that Sky has a dominant position in the market"
and is "dominant on platform ownership".
Mr Lansley asked whether the best
way of "dealing with a situation of dominance" is "sometimes.
. . to deal with the structure of the dominant operator"
and stated that Sky, "as the dominant operator in relation
to digital television, in institutional terms still have one company,
which is both a platform provider and a channel provider".
Mr Grogan suggested that competition
and market entry for broadcasters was impeded because of Sky's
Sky is not aware of competition authorities
determining that "digital television" comprises a relevant
market, or that anyone has been determined "dominant"
in respect of it. Clearly, in the television market, which includes
the BBC, ITV and others, Sky is not dominant. Sky's channels as
a whole attract a viewing share of around 6 per cent compared
to the BBC's 38 per cent and ITV's 27 per cent. 
Neither, in the context of the OFT's ongoing
Sky investigation, has Sky been held to be dominant in the narrower
market for the wholesale supply of pay TV which the OFT has defined.
"Central to this investigation", the Director General
of Fair Trading recently stated, "have been questions about
whether BSkyB has a dominant market position in relation to the
wholesale supply of premium sports and film content, and if so
whether its pricing policies have abused that position" (emphasis
at this stage, no formal conclusions have been reached by the
OFT on BSkyB's market position. Moreover, at the retail level,
the OFT has not defined a relevant market at all, let alone decided
that Sky is dominant in it.
In terms of platform ownership, although ownership
of platforms has not been specifically defined by any regulator
as a "relevant market", it is nevertheless the case
that in respect of Sky's control of the satellite platform's conditional
access system Sky is regulated under a regime acknowledged by
the regulators to be an efficient one, so to the extent that any
relevant platform market were defined, and Sky were held dominant
in it, an adequate ex ante regime already exists to deal with
Furthermore, it is important to recognise that
the holding of a dominant position is not prohibited by competition
law. It is the abuse of a dominant position, not the position
itself, which is prohibited. This is contrary to the impression
observers of the Joint Committee might receive from some of the
oral and written evidence submitted to it, suggesting that dominance
itself is a problem and that it should perhaps be OFCOM's role
to "get rid of it".
In particular, OFCOM's duty to promote competition
should not be used to attack the market position of allegedly
dominant companies who are not guilty of any abuse. As Sky has
also explained elsewhere, a regime for dealing with abuse of a
dominant position exists under the Competition Act, and it is
these powers (together with those under the Fair Trading Act)
which should be used in those circumstances, not the powers arising
from OFCOM's duty to promote competition.
3. THIRD PARTY
Mr Grogan suggested that competition and market
entry for pay TV channels was impeded because of Sky's "dominant
position" and the fact that "most of them [third party
pay TV channels] end up doing deals with you".
As an example, he said:
"It would be quite difficult for me to launch
my cricket channel, let us say, because of your dominant position."
Digital satellite is an open platform. Broadcasters
can obtain capacity from a relevant satellite operator (SES or
Eutelsat) and retail or otherwise provide their own channels independently
of Sky's pay TV packages. This is achieved through access being
made available to the EPG and, where appropriate, through the
provision of conditional access services (encryption, entitlement
and regionalisation). The relevant BSkyB companies are required
to provide these services on a fair, reasonable and non-discriminatory
basis. As Sky noted to the Joint Committee, it has entered over
180 agreements with third parties for these regulated services.
The satellite platform currently supports more
than 380 TV and radio services, of which Sky owns only 10 (or
20 if the timeshifted versions of its movie channels are included),
plus a pay per view movie service. The vast majority of the rest
are third party services unconnected to Sky who are legally entitled
to distribute their services on the satellite platform. As of
4 July 2002 the services on the satellite platform were made up
84 basic TV and radio services;
59 premium, bonus and a la carte
TV and radio services;
79 free to air TV channels;
56 free to air radio channels;
13 subscription channels (not retailed
80 pay per view channels;
three customer/barker channels;
nine interactive services (four of
which are Sky services).
There are currently approximately 160 services
not retailed by Sky on the digital satellite platform, including
third party subscription channels such as Sony TV Asia, B4U Movies,
Zee TV, Zee Music, Zee Cinema, Pakistani Channel, Prime TV, Playboy,
Adult, Fantasy, Ekushey TV, Sirasa and Tantalise.
Furthermore, Sky sometimes retails subscription
channels on behalf of third parties (eg The Disney Channel, Film
Four). The fact that these channels are retailed by Sky reflects
their wish to take advantage of Sky's marketing and retail expertise.
It is not anti-competitive in any way and has helped facilitate,
rather than foreclose, entry. Nor does it detract from the option
a broadcaster has to retail its service(s) itselfa choice
denied to it (and to Sky) on all other platforms.
Sky has no ability to stop Mr Grogan's cricket
channel, or indeed any new entrant, from launching and retailing
competitive channels independently of Sky's pay TV packages. Nor
is Sky incentivised to foreclose others' entry. Sky has spent
£2 billion in the hope that the digital satellite platform
will be a successand consumer research consistently shows
that the main reason why people subscribe to digital pay TV is
for the proposition of wide choice. Therefore, the more services
on the satellite platform, the more chance Sky has of making a
success of the platform and ultimately making a return on its
The ability of any broadcaster to launch and
retail competitive channels on digital satellite is in contrast
to closed platforms like cable, in which cable operators are able
to deny access to third party services, including those that compete
with platform operators' own services. For example, Sky's pay
per view movie services are unable to get carriage on UK cable
systems because the cable operators run their own pay per view
service, Front Row, and they do not want any competition to it
on their networks. Were they to choose to supply their own Front
Row service via satellite, however, they would be guaranteed access.
Earlier this year a number of MPs queried the
non-availability of the ITV Sport channel on digital satellite.
It is important to note that ITV deliberately withheld the ITV
Sport channel from satellite viewers whilst adopting a policy
of blaming its lack of availability on Sky. Had
ITV decided that it wanted to make ITV Sport available via digital
satellite, it could have adopted one of two approaches. It could
have reached agreement with Sky for inclusion in Sky's retail
it could retail the channel itself by taking conditional access
services from Sky.
Sky has facilitated, rather then impeded, competition
and market entry in UK broadcasting through its successful establishment
of an open satellite platform already reaching nearly 6 million
Some of Sky's competitors, particularly the
terrestrial broadcasters, have been trying to create political
momentum behind the idea that Sky's ownership of programme content,
and the fact that it has invested in building the satellite platform,
is somehow a "problem" that needs "a solution".
However, no one can actually point to any distortion of competition
to back up their claims.
It is notable that the Government sees no problem
and the draft Bill makes no proposals to interfere with the structure
of the market by forcing a split of content and platforms.
The Government has recognised that Sky's ownership
of content incentivised it to build a platform and has actually
created competition and encouraged entry at an unprecedented rate.
The White Paper also noted that a ban on vertical integration
would "slow down the necessary investment in high speed networks".
Yet the suggestion has arisen a number of times
in the course of the Joint Committee's sessions that Sky will
use its content to favour its platform and its platform to favour
its content, to the detriment of competition.
Not only does neither of these things happen
in practicebut the suggestion discloses a fundamental lack
of understanding of what drives Sky. Sky has no incentive to do
either of these things.
Take the potential use of content to favour
the satellite platform.
Sky's business is based largely on fixed costs.
For example, Sky pays for all its sports rights on a fixed rights
fee basis and Sky takes all the risk that it will be able to attract
enough subscribers to pay for the rights and make a return on
its investment. To have the best chance of doing this Sky needs
to obtain distribution to as wide a base of consumers on as many
of the existing distribution platforms as possible.
The suggestion that Sky would like to deprive
third party platforms of its programming, or price them so that
it is difficult for third party platforms to sell them, totally
ignores the commercial reality, which is that Sky needs wide distribution
to cover its costs. Sky has no subscriber acquisition cost for
subscribers signing up to other platforms. Last year Sky's wholesale
revenues from distribution of its channels on cable and DTT was
£300mand most of this goes straight to the bottom
That the economics of high fixed cost channels
cannot work unless the broadcaster is willing to distribute on
all platforms can be seen from the experience of ITV Digital.
It made the decision to keep ITV Sport off the satellite platform
to try and advantage its DTT platform, and collapsed under the
weight of the hundreds of millions of pounds of investment it
had made in Football League rights.
Sky has also campaigned for open access to cable
platforms to try and ensure that it can be sure of getting its
channels distributed. This would be irrational behaviour for a
broadcaster seeking to withhold, not supply, its channels.
Next, consider how Sky could use its platform
to favour its channels.
Sky undertook massive investments in launching
the satellite platform in full knowledge that it could not reserve
all the capacity to itself or deprive others of access. Sky does
not control "capacity" on the satellite platform. Capacity
comes in the form of satellite transponderswhich are in
abundanceand they are leased directly from SES (Astra)
and Eutelsat, satellite operators which are unconnected to Sky.
What Sky controls is the ability to switch on
and off satellite viewers' smartcards which reside in their set
top boxes according to the channels they are entitled to see.
This capacity is not constrained and so there is no need or ability
for Sky to "reserve" any capacity for its own channels.
Sky also launched the platform in full knowledge
that access to digital satellite platforms would be regulated
through the fair, reasonable and non-discriminatory access requirements
of the Advanced Television Standards Directive, and regulated
by Oftel in the UK. Furthermore, even before digitalin
the relatively unregulated analogue satellite worldSky
made its platform available to third party broadcasters just the
As noted earlier, Sky has invested vast sums
in the hope that the platform will be a success. Consumers principally
subscribe to digital pay TV for the proposition of wide choiceso
the more services on the satellite platform, the more chance Sky
has of making a success of the platform and ultimately of making
a return on its investment. Sky has absolutely no incentive to
"shoot itself in the foot" by denying access, even if
this were legally possible. Such a strategy would only serve to
damage a platform in which it has invested £2 billion, by
making it less attractive in comparison to other platforms' offerings.
Therefore, to summarise:
Sky needs wide distribution for its
channels to recover its costs, which are largely fixed;
access to the satellite platform
is available to all comers on fair, reasonable and non-discriminatory
terms regulated by OFTELno one has been denied such access;
there is no capacity constraintsupply
of transponder capacity is plentiful and not controlled by Sky;
Sky has no incentive to deny access
to the satellite platform because it is trying to make a success
of itand the more services on offer the better.
At the heart of the draft Communications Bill
are fundamental principles under which "regulatory activities
should be transparent, accountable, proportionate, consistent
and targeted only at cases in which action is needed",
and regulation must not impose or maintain burdens which are,
or have become, unnecessary.
It is essential that the Joint Committee apply these principles
to its assessment of alleged problems and does not unjustifiably
call for further intervention in areas such as the issues above.
16 As clarification of Mr Ball's evidence regarding
Sky's ability to acquire Channel 3, his comments "I would
think that if we were buying Channel 3 on competition grounds
we would not be able to do that anyway, so you do not need that
[cross media ownership] rule" and "If the rule was not
there, we would have difficulty anyway" were intended to
impress on the Joint Committee that any attempt by Sky to do so
would be met with intense regulatory scrutiny, most likely in
the form of a Competition Commission inquiry. It was not intended
to infer that the outcome of any such scrutiny would necessarily
preclude a Sky purchase of Channel 3. Back
Foreword to the Communications White Paper. Back
Uncorrected transcript, paragraph 617. Back
Ibid, paragraph 624. Back
Ibid, paragraph 636. Back
Most recent published ITC Audience share Figures for the 12 months
ended 31 December 2001. All figures rounded. Back
Speech by John Vickers, IEA Conference on The Future of Broadcasting,
24 June 2001. Back
Uncorrected transcript, paragraph 636. Back
Last year, Gerry Murphy, Chief Executive of Carlton, told Mediaweek
(25 June 2001) that ITVDigital would have more sport than any
other platform because of its exclusive distribution of the ITV
Sport channel, whilst Rob Fyfe, Chief Operating Officer of ITVDigital,
told the Daily Mail (26 July 2001) that he had "been
fighting long and hard" to keep ITV Sport exclusive to ITVDigital. Back
Sky offered ITV terms for such a distribution deal but ITV declined
to negotiate. As the Financial Times reported (16 June
2001): "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 [DTT] subscribers."
The Daily Telegraph also reported (16 January 2002) that
"Champions League football will not be made available to
Sky viewers after the ITV Sport channel pulled out of talks to
join the broadcaster's digital platform." Back
Clause 3(2)(a). Back
Clause 5(1). Back