BSkyB Bites Back

Chris Forrester


BSkyB will fight tooth and nail to defend its powerful exclusive channels from predatory pricing - and will battle with a regulator for its "unprecedented interference". TV regulator Ofcom - in a 360-page report - has told BSkyB that it must allow its rivals to access all its channels, including its ‘Crown Jewel' sports and movie channels. Sky, not unexpectedly, is robustly saying ‘Back off'.

Sky's rivals, including Virgin Media and British Telecom, have long lobbied for access to these channels. "We want our premium channels to be widely available on other platforms," BSkyB CEO Jeremy Darroch said in a statement. "But we deserve a fair return. Forcing Sky to sell its channels for less than their true value is a subsidy for companies that have shown no appetite for investment in programmes. It defies belief that Ofcom expects Sky to lower its wholesale prices to compensate for the higher costs of less efficient platforms."

He continued: "Ofcom is proposing an unprecedented level of interference in commercial markets," and threatened a slew of legal actions on Ofcom, the Competition Commission, and Uncle Tom Cobbley and all. While the Ofcom news was not unexpected, Sky's blistering response suggests it has a strong defence already well mapped out, and likely to take the argument well beyond the life of this government.

Ofcom says requiring Sky to make its premium channels available to other retailers on a wholesale basis was the most appropriate way of ensuring effective competition. The regulator also stated that it would be looking for changes in the future as to how sports auctions would be handled, and is contemplating passing to the Competition Commission a complaint as to how Sky's deal with the all-powerful Hollywood studios were handled.

Richard Scudamore, Premier League chief, and speaking on the impact fresh rules might have on his soccer TV rights, said: "We are surprised that Ofcom is seeking to revisit an issue that was addressed to the satisfaction of the European Commission.We will resist any measures that disincentivise media organisations from bidding for our rights." The League's worries concern the possibility that if Sky - or any other broadcaster - is forced to wholesale channels to allcomers, then why bother to bid ‘high' for non-exclusive coverage.

The background to this latest spat began in January 2007 when Ofcom mounted its review into the Pay TV business in the UK. There was a second consultation paper in September 2008.This document set out the concept of 'must wholesale' for BSkyB's premium programming and a range of options of how these wholesale prices might be regulated (cost plus/retail minus). At that stage, Ofcom ruled out any more drastic remedies. In particular, it ruled out (i) Any break up of Sky between its wholesale and retail arms (deemed disproportionate); (ii) Any direct intervention in the way in which sports and movie rights are sold.

Investment bankers Morgan Stanley outlines what's new in this latest Ofcom missive:

* Ofcom adopts a hostile tone towards BSkyB. For instance, OFCOM asserts that it believes Sky feels an incentive to restrict supply of core premium channels to other retailers which arises from its own vertical integration between retail and wholesale activities. Ofcom claims that Sky's pricing to Virgin is dictated by Sky's view as to the highest price it can charge without coming into conflict with the OFT's 2002 margin squeeze test rather than on a commercially backed calculation.
* The chief innovation in this document is Ofcom's declarations on the nature of the regulated price regime that it feels should accompany the must wholesale provision. Ofcom proposes a retail minus based formula (p267).
* Ofcom has suggested a range of suggested wholesale prices for the various channels and Mixes. Page 310 outlines the suggested price ranges. For Sky Sports 1 for instance the range is GBP9.41- GBP11.24 against an existing rate card of GBP13.48. The average suggested price discount to the existing rate is around 20%.
* Ofcom believes that its regulated prices will still allow Sky a reasonable return based on its investment at the wholesale channel level based on an estimate of 10.3% for Sky's cost of capital.
* Ofcom's aim is to allow a larger competitor (for example reaching 3 million subscribers after 10 years) to compete with Sky's retail prices.
* Having set the initial new wholesale prices, Ofcom would then look to have a continuing mechanism of wholesale price control. Ofcom suggests an RPI related 'ratchet 'approach. This means that if retail prices decrease wholesale prices should also decrease. In the event of retail prices rising Sky's wholesale prices could also rise but Sky would first need to seek Ofcom's consent.