Sky is to challenge Ofcom’s proposals to set a reduced price at which Sky would be forced to supply its premium sports and movie channels to third-party platforms. In its response to the latest Consultation Document in Ofcom’s Pay TV market investigation, Sky makes clear that this would be an "extreme and unprecedented" intervention in circumstances in which Ofcom has not found Sky to be in breach of any competition law and has acknowledged that good outcomes are being delivered for consumers.
As part of the submission, Sky will argue that:
- Ofcom is seeking to pursue industrial policy
Ofcom is seeking to treat Sky’s premium channels as "regulated assets" in order to pursue a "clear agenda … to promote the growth of Pay TV retailers operating on DTT, and to encourage Pay TV retailing on new IPTV platforms". The proposals are in essence a form of "industrial policy under which Ofcom wishes to step in and seek to ‘manage’ the market in an effort to promote the growth of particular high-cost technologies that it has chosen to favour”.
- Ofcom’s proposals go beyond competition law
While Ofcom acknowledges that its proposals go far beyond what would be required under competition law; it fails to recognise that, in the circumstances of the present case, such a departure from orthodox competition law principles renders its proposed intervention unlawful. In its submission, Sky argues that "Ofcom appears to accept no meaningful constraint at all on the use of its sectoral competition powers".
- Ofcom has failed to think through the consequences of its proposals
Ofcom has put the achievement of its objectives ahead of a proper evidence-based consideration of the issues. The consequences of the proposals would be "overwhelmingly detrimental":
- blunting incentives to invest in content and innovation;
- sending a clear message that investment in content is regarded by Ofcom as less
important than investment in infrastructure;
- having the potential to create serious distortions of competition both in relation to retail
pricing and in innovation; and
- creating all the detriments to competition and efficiency that arise in any cases of
subsidy and detailed central planning.
- Ofcom’s financial modelling is "not fit for purpose"
Ofcom’s financial model of the profitability of Sky’s notional premium channels business contains a number of basic but material errors which affect the results substantially. For example, Ofcom’s model overstates the notional business’ revenue by assuming UK Sky subscriber net growth in 2008/9 of 736,000; compared to the actual reported net subscriber growth in UK and Ireland of 462,000 – the highest figure for five years.
Once those errors are corrected within Ofcom’s model, the model indicates that, were Sky actually to charge the wholesale prices at the low end of Ofcom’s range, the notional premium wholesale business would expect to lose more than £700 million over 4 years and would expect to incur an average loss as a percentage of sales of 15%. This is a clear illustration why regulators such as Ofcom should not seek to manage markets.
If those same errors are corrected, but it is assumed that Sky charges its current cable ratecard prices, Ofcom’s model indicates that the notional premium wholesale business would earn an operating margin of around 24%, which Sky has shown is at the low end of the estimates for a number of comparator companies. Hence all the available evidence suggests that Sky’s current wholesale margins, at current cable ratecard prices, are entirely normal.
- Sky does not withhold supply of its premium channels
In December 2007, in an attempt to end the stasis arising from Ofcom’s various reviews and investigations, Sky proposed to Ofcom that it would agree to wholesale its premium channels based on a wholesale pricing scheme which would have offered substantial discounts to any retailer improving on the then level of Sky premium channel penetration on cable networks.
This proposed scheme formed the foundation for the progression of weeks of subsequent detailed discussion between Sky and senior Ofcom officials. Despite five months of constructive discussions, Ofcom decided to reject Sky’s proposals on the basis that "our respective views on the issue of the price of any wholesale offering remained, despite our respective best efforts, apart".
Since then, Ofcom has been implacably committed to finding a means through regulation of securing deeper wholesale price cuts than those which would have flowed from the wholesale pricing scheme which Sky offered to adopt – an offer which should have been more than enough to satisfy a regulator acting reasonably. As a result, Ofcom’s investigation has (so far) continued for a further year and a half during which time Ofcom has continued to withhold its approval of Sky’s application to broadcast its premium channels via DTT, with the effect that consumers continue to be denied any possibility of accessing those channels via DTT. Ofcom’s purported use of its powers in this way is "illegitimate and unjustified".
In conclusion, Sky’s submission states:
"Ofcom’s proposals are essentially confiscatory, and suggest that the moment a firm makes a return above its cost of capital, Ofcom will price regulate in order to ensure that its returns fall back into line with those implied by Ofcom’s spreadsheet models of perfect competition. If implemented, Ofcom’s proposals would send an extremely negative message about the UK as a place to invest, and Ofcom as a responsible licensing authority. Ultimately and most of all, however, all of the above effects would result in serious detriment to consumers."
To read the overview of Sky's submission, click here.
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For more information, please contact:
Robert Fraser
Director of Corporate Communications
robert.fraser@bskyb.com
Tel: 020 7705 3036
Francesca Pierce
Head of Investor Relations
francesca.pierce@bskyb.com
Tel: 020 7705 3337