200704034

Report into the Economics of the BSkyB Investigation by OFCOM

5/5/2011

INTRODUCTION

Overview of UK pay TV Market

MAVISE(2010) reports that the UK TV market is one of the largest in Europe which is structured between Digital terrestrial, satellite, Cable, and IPTV operators . Which are viewed by 10.2, 10.6, 3.7 million, and about 467,000 subscribers respectively as at March 2010. The UK pay TV market is offered on across these platforms with the major operators being BskyB on the satellite, Top-Up TV on the digital terrestrial, Virgin Media on the Cable, and BT Vision on the IPTV platform. Virgin media is reported to be the main cable operator in the UK with about 3.7 million customers at the end of June 2010, Top-Up TV with about 0.5 million subscribers and BskyB with over 9.3 million customers. (MAVISE 2010) There has been a lot of investment into the pay TV market by the various stakeholders leading to the introduction of new technologies and innovations such as the broadcasts in High definition, video-on-demand (VOD) and Internet Protocol TV (IPTV). This had led to the formation of Project Canvas which has the potential to transform television through the use of the Internet and IPTV services.(OFCOM 2010) It affords viewers to access content from various providers on a vast range of devices, and will include the already popular catch-up TV service. Participators include ISPs BT Vision and Talk Talk and the broadcasters BBC, ITV, Channel 4, and network operator Arqiva .(MAVISE 2010) Ofcom, the UK communications regulator over the years 2007-2010, have been investigating into the pay TV market and this was at the request of a number of the operators in the market. Ofcom investigated into matters relating to content, ownership of distribution platforms, retail subscriber bases and vertical integration. (MAVISE 2010) The investigation concluded in Ofcom ordering the channels Sky sports 1 and Sky Sports 2 owned by BskyB being offered to other operators of platforms in the pay TV market i.e. Virgin Media, BT Vision and Top-Up TV from August 2010, also BskyB were given conditional permission to launch a pay TV service on the digital terrestrial platform known as picnic on the condition that BskyBs premium content is also offered to their Competitors on the platform. The premium content in question is the Live TV broadcast rights of major
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sporting events; first run broadcast rights and video on demand rights to Hollywood movies. The decision to share this content on other platforms are limited to sport broadcast rights at the moment as Ofcom are not fully equipped legally to consider the case of the movies and have reported it over to the Competition Commission (CC) for further consultation. (OFCOM 2010)

KEY FEATURES OF OFCOMS INVESTIGATION AND DECISIONS The main decisions taken by ofcom in the investigation into BskyB were mainly : To require that Sky Sports 1 and 2 are offered to retailers on platforms other than Skys, at prices set by Ofcom. To approve Sky and Arqivas request for Sky to offer its own pay TV services on digital terrestrial TV (Picnic), but conditional on a wholesale must-offer obligation on Sky Sports 1 and 2 being in place, with evidence that it has been effectively implemented. This conclusion is also conditional on any movies channels included in Picnic being offered to other digital terrestrial TV retailers. To consult on a proposed decision to refer two closely related movie markets for the sale of premium movie rights and premium movie services to the Competition Commission. This is with a view to asking the Competition Commission to remedy those competition concerns which we have identified, particularly in relation to the restricted exploitation of subscription video-on-demand movie rights, but which we cannot adequately address using our sectoral powers. (Ofcom, 2010,1)

Looking from the diagram above, the pay TV market could be described to be divided into 3 parts; content production, Content distribution (wholesale and retail) and Content delivery(consumers). The inputs to this process are the premium content which are now sold to right holders which is either distributed wholesale service providers or retailed. Vertical integration could occur in which there is a link between the production and retail or delivery in which are through in-house programmes and set- top boxes respectively. (Armstrong, 1999, 3) Did BskyB have market power and did they abuse it? The access to various TV premium content on to consumers irrespective of platform has been a major competition issue for regulators in various countries. (Weeds 2009) Most especially in the UK in which the ownership and distribution of these premium content has been a subject of competition concerns for Ofcom for many years. This prompted Ofcom to commence investigations into BskyB into its wholesale operations of this premium content to other platforms in the pay TV market. BskyB have acquired the rights to premium sports content such as the live broadcast of the premier league football games and first run Hollywood movies. This premium content is packaged in channels on BskyB digital satellites platform on Sky Sports 1, 2 and Sky
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Movies. BskyB also sell advertising airtime for these premium content and gain advertising revenue. BskyB have also invested in the packaging of this premium content with introduction of High definition broadcasts. This premium content is highly sought after by consumers and has no substitute which other competitors can provide to consumers. BskyB can wholesale this premium content to other providers on other platforms on wholesale basis gain additional revenue in addition to advertising and retail fees. (Ofcom 2010) BskyB have had exclusive rights to these premium content for many years and it can be seen that they definitely possess market power in term of the distribution of this content as they have no substitutes, the uniqueness of the content in which make highly sought after by consumers and therefore gain market power, and BskyB exploit this market power by limiting its wholesale distribution to its competitors. (Ofcom 2010) According to the OFT (1996) BskyB possesses market power for the supply of premium content on a wholesale basis, and exploited this leading position in the market through the barriers to entry posed to cable platform operators. These barriers to entry include the programming rights, transmission and distribution infrastructure as cable services are not available in all areas of the UK, the cost of investment and maintenance of such infrastructure is only possible by a single firm as it is a contestable market. In addition to the exclusive rights to this premium content, BskyB have first choice in bidding for future premier content due to substantial difference in bids they have offered over the years compared to their competitors

Bundling What is Bundling?

Bundling, also known as tying is defined as when A firm engages in tying when it makes the sale {or price) of one of its products conditional upon the purchaser also buying some other product from it. (Whinston, 1990; 837) Adams and Yellen (1967)define bundling as the sale of two or more differentiated products in a single package (Carbajo et al,1990; 283)

Carlton and Waldman(2002) go further to describe it as tying which is a common occurrence in major markets, giving examples of various manufacturers such as Microsoft and IBM. In which the good used to sell is called the tying good and the good sold is the tied good. Nalebuff (2003) also defines it as the sale of two or more products coupled together, which could have been sold separately and sold at a discounted price in a bundle relative to the individual price of the product. Bundling could be said to be of two forms: pure and mixed bundling. Pure bundling is said to be when two products are coupled together for sale in mixed proportions and are not available for sale individually. While mixed bundling could be described as when product coupled together as bundle is also available for sale individually and which the bundle is sold at relatively cheaper price than the Individual units. Taking the example of BskyB, to enjoy premium content i.e. either sports or movies, a basic package has to be acquired in order to enjoy this service. The basic package also comes as a bundle of about six different packages in which a single package comes at a more expensive price than consuming the whole bundle exhibiting BskyBs mixed and pure strategies. Bundling has been a major competition issue for many regulators in various countries all over the world, with very popular cases including the Microsoft case of Internet Explorer being bundled with Windows operating systems in the US. (Carlton and Waldman, 2002) In the European markets, the case of Tetra Pak which the bundling of packaging machines to cartons in which Tetra Pak had considerable market power in the production of Packaging machines. (Spector, 2007) Many regulators, scholars and competition analysts have been researching into the motivations, incentives and rewards gained by firms who participate in this anti-competitive practice for many years. (Carlton and Waldman, 2002) In revealing the impact of BskyBs behaviour on consumers, competitors and the market, we ask the question. What are the incentives to bundling? Various authors have coined various literature o different reasons to bundle, models to support them and their effects. Nalebuff(2003) suggests that the incentives to bundle can be classified into two levels. Which are mainly efficiency arguments and strategic planning. The most popular reason for bundling suggested by most authors is the leverage theory which is used by BskyB to gain market power and relating to literature from the Chicago school.
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The leverage theory did not prove bundling amassed market power and profits but BskyB case was an exception to that rule due to the nature of its market. (Nalebuff 2003) In the arguments to utilize bundling as a means of improving efficiency, we take into account the use of bundling as a price discrimination tool, Carlton and Waldman suggest that in a market where conusmers have different valuations for the tying good and the tied good and the ability of the ability of the monopolist to bundle this good with different valuations would lead to profits for the producer. This is evident in the manner in which BskyB operates its wholesale and retail operations in which the bundle offered to retailers comes at a relatively cheaper price than when it wholesales to other platforms making it difficult for the wholesalers to retail without charging higher to its consumers. Also Venkastesh (2009) explains further highlighting the profits accrued to bundling firm is reliant on the reservation price of the consumer being below marginal cost which entices the consumer but the bundling effect corrodes away the consumer surplus to be gained thereby reducing the consumers welfare. Venkatesh (2009) also explains further that the vertical integration possessed by Sky through its operations in order markets such as Broadband and telephony services enable it to amass more market share through the bundling of TV, Broadband and Phone services undercutting the prices of its competitors. Nalebuff (2003) suggests in an oligopolistic market situation, the bundling of goods acts good entry barriers to entrants. Whinston (1990) corroborates this as a lack of substitutes to the premium goods leads to the increased profit margins. The entry barrier used by in this case is the Wholesale distribution of it premium content. The reluctance of BskyB to negotiate terms of distribution to other operators especially on its digital satellite platform acted as protective instrument to its satellite platform and weakening any forms of competition to its broadcast rights. Harbord (2001) explains the per subscriber fees at which BskyB charges it competitors on the sale of its premium content through vertical contracts which allow firms in the downstream sector to charge high prices taking the example of Sky increasing its subscription prices when BT charged a lower price. (Wray, 2010) Effects of Ofcoms decision on the Pay TV market The decisions of Ofcoms decisions in some way have distorted the Pay TV, most especially with the conditional access granted to Sky picnic proposal in the relation to wholesalemust offers on premium content. The digital terrestrial market is reported to consist of about
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ten million viewers (OFCOM, 2010) which do not have access to innovative, added value services provided by BskyB as the decision of Ofcom are considered unfavourable by BskyB and as a result would restrict their products from the digital terrestrial platform. Also according to Sweeney(2010) BskyB have contested this decisions in court , which puts on hold any offerings which could bring any cost savings to consumers. As BskyBs applied for a stay of delay to the new pricing plans recommended by OFCOM. ( Sweeney, 2010).

References

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