The news that Ofcom has decided to investigate the U.K. pay-TV market has come as a little surprise given the ramping-up of pressure by players such as Virgin Media, however, analysts agree that the review is unlikely to spell huge trouble for BSkyB. Sarah Simon, a media equity analyst at Morgan Stanley pointed out this "was not just an investigation into BSkyB alone" and that Ofcom would be analyzing all areas of the U.K. pay-TV market. Simon also believed the length of the review could also work in BSkyB’s favor. She said in a research note released last week that "although Ofcom states that this process will at least take ‘a number of months,’ it could end up being years before conclusions are reached. In the meantime, the market will have further evolved, rendering conclusions invalid."

However, there are some interesting undercurrents on this investigation. BSkyB has been particularly aggressive of late. A tough negotiation process with Virgin Media, as well as its intentions to take its basic channels of Freeview and launch a pay-TV service instead, have sent out a clear statement of intent in the early part of the year. Omar Sheikh, a media equity analyst at Dresdner Kleinwort said in a research note that it was "interesting" that BSkyB would still deploy these aggressive strategies even though a detailed submission to Ofcom was being lodged. Sheikh added "our interpretation of this is that the risk of an investigation was one the company felt was worth taking, given the potential long-term strategic benefit of making its own content available only on its DTH platform. We also assume the company calculated that if a regulatory investigation was on the way, it had little to lose by, for example, announcing an intention to pull content from Freeview. We think Sky has taken a strategic decision that, in order to continue to grow its DTH subscriber base, it is important to withdraw as much basic content as possible from other platforms. Furthermore, we think it is safe to conclude that should some basic content remain available on Virgin Media and Freeview, Sky’s DTH subscriber growth will be lower than would otherwise be the case."

With an open and fairly vibrant market, one of the questions arising from this investigation is whether Ofcom may implement any many changes that would drastically affect BSkyB. Simon thought not, commenting "the bottom line here is that we believe this will be a long-running investigation that may find it hard to impose major changes in the pay- television industry, given the pace at which the industry is changing. It is true that Virgin Media is in a stronger position to make representations to the regulator, and having other players on its side will help. However, at the same time, BSkyB may argue that the creation of this stronger competitive counterpart to its satellite business is inherent proof of a more open marketplace. There are certainly concessions that BSkyB may have to make – perhaps cancelling the launch of its pay-DTT service." Daniel Kerven, an analyst at UBS wrote in a research note, "Ofcom may impose some restriction on Sky to ensure its DTT box is open and compatible with other services, [but] we do not believe Ofcom will stifle the development of the TV market and choice to the consumer in order to protect these businesses. Overall we believe that Sky has already been subject to significant scrutiny in the past and that competition has subsequently increased and that further regulation on Sky would punish it for the investment and innovation it has made to build its market position and develop the UK TV market. Indeed, it could be argued that the demand for a review by BT and Virgin is driven more by Sky’s entry into the voice and broadband markets where there has been limited competition in the past than any new developments in the pay TV market."

Sheikh highlighted four potential results of the investigation: 1) Ofcom introduces wholesale rate cards for premium and non-premium content to reduce Sky’s margins from the content it buys. 2) Keeping Sky from launching pay channels on Freeview leaves an opening for Setanta to launch its Premier League offering; if Sky’s free channels (Sky News, Sky Three and Sky Sports News) remained on the platform, Freeview’s content offering would be undiminished. 3) Sky’s content is made available to DSL providers; BT’s access to Sky’s content could alter the attractiveness of BT Vision and its triple-play offering. 4) Forcing the opening up of cable network since, as Sky has argued, it is anomalous that its satellite network is open to all channel providers on fair and non-discriminatory terms, while the cable network is closed.

–Mark Holmes