The UK's PayTV Market Investigation

The UK PayTV market has never been so competitive: we have the relaunched Virgin Media (VMED), the newly refinanced TopUpTV and Tiscali (aka Homechoice), the financial might of BT, Vodafone (VOD), Orange (France Telecom) and O2 (Telefonica (TEF)) which have just launched or are about to launch IPTV services, and of course 800lb reinvigorated gorilla, BSkyB (BSY).

Therefore in terms of number of market players the PayTV market has never been healthier.

If we look at the DTT market, OFCOM have only just ruled in Mar-2006 that PayTV was acceptable on the 3 of the muxes carried by Freeview platform and in that consultation neither the BBC, nor Five objected to PayTV services on the Freeview platform, however Channel 4 did and the ITV comments aren’t in the public domain. OFCOM currently have a consultation underway about Fair and Reasonable Access to the TopUpTV platform which is due to close in April.

In both of these consultations, I can’t see any reference to the possibility of a second PayTV platform on DTT Freeview, and therefore I expect the BSkyB proposals were a bolt out of the blue for OFCOM. Given that OFCOM is all about promoting competition and choice in communications, I think they are going to find it extremely hard to justify not allowing a second platform on PayTV especially if BSkyB agree to FRND (fair, Reasonable & Non-Discriminatory) access to whatever conditional access platform they build.

Where there is a potential problem are BSkyB’s plans to transmit signals in MPEG-4 format rather than the current Freeview MPEG-2 and use its own encryption algorithms which will lead to the requirement for new set top boxes for the service and potentially cause problems with the old boxes. This is something that the people such as the BBC, ITV and National Grid Wireless (the owners of the DTT muxes) will be extremely wary of especially in the run-up to Digital Switch Over and the potential confusion it could cause customers.

Balancing against this is the fact that MPEG-4, or some other compression algorithms, are the way forward in the future and was in fact the format used by the BBC and National Grid in the recent HD trials. BSkyB is effectively once again trying to set the pace of innovation in the broadcasting market and some people don’t like it. Of course, it helps that BSkyB have the rights to the best premium content in the business and a TopUpTV/Setanta combination would look decidedly second rate and technologically inefficient in comparison. There is also the potential for BSkyB to build a dual-tuner set-top box for both DTT and Satellite and "force" that on people wanting any PayTV content.

The next big problem which BSkyB has been shouting about loud and hard to anyone would listen is the VirginMedia monopoly over its platform and it being a closed system. Virgin Media allow the XXX industry to sell direct and we all know why that is, but no-one else is allowed direct customer contact either for TV, Broadband or Telephony services. Personally, I don’t think BT or the rest of ISP industry is that bothered that the cable system is closed, because they view it as inferior. In fact, the OFCOM approach to the wholesale broadband services where “markets” are categorised according to competition, whether BT Wholesale, Cable or LLU, implies to me that OFCOM will not look at cable as a monopoly, but as a competitive option to BT.

Where BSkyB might have more success is arguing that VirginMedia do not carry the bundle of channels that BSkyB want them to carry. Obviously, the sports channels and movies are regulated and more about these later. However, for “competitive” consumer faced entertainment or news channels such as SkyOne, Two, SkyNews; BSkyB can legitimately claim that VirginMedia will not carry the bundle of channels thatBSkyB desires. VirginMedia have turned the recent debate into one of price, whereas BSkyB will turn it into one of access. Here, BSkyB potentially have a vast army of “niche” content providers to help them out, especially minority channels.

A lot of people complain about the Sky EPG costs (such as the BBC) but it is in fact relatively cheap to run a channel on Sky, with music channel specialist, EMAP, publicly stating it is cheaper than running a magazine. I believe the transponder costs (payable to ASTRA not BSkyB) are around £0.25-£0.5m pa and then Sky’s EPG/encryption costs are on top of this but can actually be quite small for niche channels. A “medium” example is the Smash Hits channels which pays £137k in platform contribution and £15k in encryption charges. Of course there are channels paying a lot more than this, for instance the top channel payer is BBC1 which is charged a £3.9m per annum platform contribution (of course they don’t pay the encryption charge). However, BBC1 have the regional variance problem which BSkyB specifically designed a solution for. The Sky “SSSL” rate card is open and published on the Sky Corporate Web Site.

However, all these charges should be countered against the Freeview charges where the capacity is much more limited than Satellite platform and I heard a jungle grapevine rumour that the last channel leased went at £15m p.a. National Grid Wireless and ITV are making a lot of money out of Freeview and transmission charges are a lot higher than Satellite equivalents. The bleating about extra “free” spectrum for HD services and not using the lastest and greatest encryption should be seen in this context.

Of course, the situation is even worse in the cable world where despite the CEO boasting about the mythical 650MHz of free spectrum available the platform doesn’t actually offer anywhere near the hundreds of channels that are theoretically possible.

I have also noticed in today’s Telegraph that the actual complaint went into OFCOM in January before the BSkyB/VirginMedia contract renewal became public and before BSkyB asked for a new PayTV platform on the DTT platform. This makes me think that perhaps BSkyB thought an investigation was always on the cards and they wanted to draw DTT and IPTV platforms into the mix.

The other point in the Telegraph is that the part of the compliant relates to the BSkyB monopoly over movies and near monopoly over premium sports rights. The problem here is that this has been investigated time and time again and Sky has its rates controlled by the regulator. There is little chance of them being reduced especially given that Sky are investing more rather than less in content rights and the content owners, such as the Premier League will not want this changing in the near, medium or long term.

BT, Orange, O2 and Vodafone should know as well as Sky that in a regulated environment all sorts of costs are allowable and, in fact, the regulation itself creates artificial barriers to entry that sometimes have the opposite effect that the complainant is looking for.

Convergence is something that OFCOM is actually promoting; however it creates huge problems in a regulated environment. And also something that no regulator in the world has yet come to grips with.

For instance Sky are going to start arguing that the huge termination fees allow the mobile operators such huge cashflows are subsidizing the entry of the mobile companies into the TV market, Virgin and BT could potentially back BSkyB up on that one. The mobile companies would counter will the huge access fees that BT are charging for copper the local loop and the monopoly rents that VirginMedia earn from fixed line telephony in fact are subsidizing BT and VirginMedia building content businesses. ITV, Channel 4 and five will argue that regulation is constraining them from competing in a converged world. The BBC will argue that everything will be okay if competition was eliminated and they were the monopoly supplier of everything. And of course, everyone will argue that BSkyB is the devil reincarnate and must be stopped for the sake of democracy.

All these complex arguments point to huge problems for OFCOM, it is going to be a long and bruising consultation, they cannot please everyone and they will possibly create a lot of powerful enemies in the process. I wouldn’t be surprised if this mess takes a lot longer than 12 months to resolve and therefore is drawn firmly and squarely into the political cycle. Given that Ed Richards is effectively a New Labour appointee the last person he can annoy is his paymaster, especially if the paymaster continues to show Stalinist tendencies.