BSkyB forced to cut wholesale price of premium sport

The British media regulator Ofcom has ordered satellite broadcaster BSkyB to sell Premier League football and other premium programming to its pay-TV rivals at a lower price than it currently charges.
Ofcom set the basic wholesale price at which BSkyB…

The British media regulator Ofcom has ordered satellite broadcaster BSkyB to sell Premier League football and other premium programming to its pay-TV rivals at a lower price than it currently charges.

Ofcom set the basic wholesale price at which BSkyB can sell its Sky Sports 1 and 2 channels at £10.63 per customer per month, a figure 23.4% lower than the present sum paid by cable operators.

In recognition of the fact that these channels are usually sold to subscribers as packages, the bundle price has been cut by 10.5% from £19.15 to £17.14.

In a statement, the regulator said: “Ofcom has concluded that Sky has market power in the wholesale provision of premium channels. Ofcom has also concluded that Sky exploits this market power by restricting the distribution of its premium channels to rival pay-TV providers. This prevents fair and effective competition, reduces consumer choice and holds back innovation and investment by Sky’s rivals.

“Today’s decisions are therefore designed to ensure fair and effective competition which should lead to greater investment, innovation and choice for consumers.”

The verdict, which comes into effect immediately, imposes a six-week deadline for BSkyB to make a new trade procurement offer to other pay-TV providers. In theory, this should mean that the new pricing will come in to effect by the start of the 2010/11 Premier League season in August.

However, BSkyB has stated that it will challenge the ruling at the Competition Appeals Tribunal, most likely as a means of blocking its implementation prior to a concerted legal battle in the High Court.

Ofcom’s decision came after a three-year investigation into the pay-TV market, the conclusion of which has drawn criticism from both BSkyB and its competitors.

BSkyB was vehement in its opposition to Ofcom’s interference. CEO Jeremy Darroch said: “We think Ofcom have got this badly wrong. This is a marketplace where the levels of innovation are higher than they have ever been before and I think consumers aren’t well served if the appetite to innovate and invest is removed.

“It’s not the job of regulators to set prices in free markets unless there’s been a breach of law or consumer harm, and that is manifestly not the case here.”

British sporting bodies including the Premier League and the Rugby Football Union have also attacked Ofcom, claiming that its actions will cause devaluation, and consequently degradation, of sporting content.

A Premier league statement said: “By forcing Sky to sell its sports channels to its competitors at a discount, Ofcom will reduce the incentives of all broadcasters, Sky included, to invest in the acquisition of sports rights. This can only have a negative impact on the ability of sport to attract a fair market value for its content.

“Ofcom’s intervention will damage all sports. Reduced income from rights sales will be rapidly reflected at every level of sport – it will be harder to recruit and retain top talent, youth development will come under pressure, investment in grounds and facilities will be deferred and, in the case of football, the ability to contribute to the rest of the game from the Championship to Sunday League level will be severely diminished.

“Ofcom appears to be trying to market engineer by putting the narrow interests of a small number of large companies ahead of the interests of sports fans across the UK. Their intervention is misconceived and wholly unjustified.”

Both BT and Virgin Media have expressed concern that Ofcom’s new pricing does not go far enough, particularly in light of the regulator’s decision to exclude BSkyB’s movie channels from the process. They were also disappointed that the wholesale prices of the Sky Sports 3 and 4 channels were not altered, although Ofcom has stated that BSkyB will not be permitted to move any premium Sky Sports 1 and 2 content elsewhere on its platform.

City sees little impact on BSkyB from Ofcom ruling

The City of London’s initial reaction to the news was positive for BSkyB, as a general consensus emerged that this ruling will cause minimal harm to the company in the short-term.

Its price rose by 3.4% up to 602p on the London Stock Exchange at closing on March 31, the day Ofcom announced the new price regulations.

The ratings agency Fitch said: “Although the regulatory changes have the potential to open up the Pay-TV and triple-play services market to more aggressive competition in time, the breadth of the selling propositions of Sky, Virgin Media and BT Group mean that changes to one part of their offerings are unlikely to be transformational for the sector.

Cubitt Consulting stated: “Ofcom’s pay-TV review conclusions will have a minimal impact on BSkyB, in our view. We believe that exclusive standard definition content is no more an important driver of growth/ARPU and we focus our attention on new technology developments, specifically on HD and VoD. We reaffirm our Hold rating on BSkyB and raise our target price to 640p from 560p.”

BSkyB’s wholesale revenues are a relatively small stream of its business. Wholesale subscriber revenue for the first six months of the 2009/2010 fiscal year was £115m from total group revenue of £2.873bn.

The danger to Sky lies in the longer-term. For Virgin Media and BT, cheaper access to premium sports content offers them a foundation to build viable broadband-based television businesses, the one model that could represent a genuine alternative to BSkyB’s satellite platform.