BSkyB UK Rivals Could Raise Broadband ISP Bundle Prices After Pay TV Ruling

The price UK consumers pay for bundling broadband, TV and or phone services when premium movie or sports content is included from BSkyB could soon rise after several recent competition rulings left Ofcom’s effort to break the media giants alleged hold over the pay-tv market in tatters.

The situation came to a head in March 2010 when Ofcom ruled that Sky had market power in the provision of premium TV channels (here), specifically its lucrative Sky Sports and Sky Movies content. As a result the regulator forced Sky to offer its sports content on a low-cost wholesale basis to rivals (e.g. BT, Virgin Media, TalkTalk etc.) and asked the Competition Commission (CC) to investigate whether similar measures were required for its movie content.

Suffice to say that some services, such as the BTVision (IPTV) platform, have made good use of this ruling to offer Sky’s content to their subscribers. Similarly the market for broadband IPTV packages is now steadily growing and thus Ofcom’s ruling has become increasingly useful for rivals that want to offer competitive TV products. But Sky has always been vocal about its opposition to the decision.

A Sky spokesperson said in 2010:

“There should be no doubt that Ofcom’s actions represent an unprecedented and unwarranted intervention. This is a marketplace where customers are well served with high levels of choice and innovation. Consumers will not benefit if regulators blunt incentives to invest and take risks.

After three years of engagement with Ofcom, we now look forward to a judicial process which will apply impartial analysis and clear legal standards.”

Ofcom has always appeared to enjoy consumer support for its move to tackle BSkyB but over the past two weeks the regulators pay-tv review has been systematically crushed by two critical rulings.

Firstly, the Competition Commission (CC) decided on 2nd August 2012 (here) that Sky’s position in relation to the acquisition and distribution of movies in the first pay window “does not adversely affect competition in the pay-TV retail market“, which the CC claimed was at least partly due to the fairly recent launch of new and improved internet video streaming services from Netflix and LOVEFiLM.

Laura Carstensen, Chairman of the CC’s Inquiry Group, said:

“Overall, we do not believe that Sky’s position with regard to first pay movie content is driving subscribers’ choice of pay-TV provider. In our view, competition in the pay-TV retail market overall remains ineffective but we were asked by Ofcom to look specifically at the role of first pay movie content and Sky’s position with regard to these rights.

In our view, competition in the pay-TV retail market overall remains ineffective but we were asked by Ofcom to look specifically at the role of first pay movie content and Sky’s position with regard to these rights.

We have concluded that this content does not provide Sky with such an advantage when competing for pay-TV subscribers as to harm competition and, given this finding, we are not proposing any remedies.”

But by far the biggest blow came at the end of last week when the Competition Appeal Tribunal (CAT) dramatically granted Sky permission to appeal against Ofcom and the Competition Commission’s (CC) ruling in respect to their remedy of the media giants position in the pay-tv market for sports content.

The CAT judgement described Ofcom’s core competition concern as “unfounded” and warned that the regulator had “to a significant extent, misinterpreted the evidence of these negotiations.” Ouch.

CAT Judgement (Permission to Appeal Extract)

“The Tribunal has concluded that Ofcom’s core competition concern is unfounded. That concern is based on the finding to which we have referred, namely that Sky has deliberately withheld from other retailers wholesale supply of its premium channels, preferring to be entirely absent from those retailers’ platforms rather than to give them wholesale access, and that in doing so Sky has been acting on strategic incentives unrelated to normal commercial considerations of revenue/profit-maximisation.

The Tribunal is of the view that Ofcom has, to a significant extent, misinterpreted the evidence of these negotiations, which does not support Ofcom’s conclusion. We have found a significant number of Ofcom’s pivotal findings of fact in the Statement to be inconsistent with the evidence.”

The full ruling goes on to list Ofcom’s many alleged mistakes and will make for grim reading at the regulators HQ, where bosses are said to be “very surprised and disappointed“. So what does this all mean? Effectively Ofcom and the related ISPs could appeal CAT’s decision but that seems unlikely given the firm deconstruction of Ofcom’s arguments and potential costs. Similarly it would take a strong stomach to bring the same case before the courts again but that’s still a possibility.

Overall this leaves BSkyB in a much stronger position than they were before, while Ofcom is being left to “immediately consider what further steps we should take to ensure there is effective competition in the pay-TV sector“. Unless Ofcom can find a viable solution then Sky might quite understandably feel the need to claw back some of its wholesale Sky Sports solutions, which could lead to higher prices for BT and Virgin Media’s TV bundle customers.