[Satellite News 04-06-10] Ofcom’s investigation into the pay-TV market in the United Kingdom has managed to unite operators that are unhappy with its policy decisions.
A number of Ofcom’s decisions relate to BSkyB’s premium content and how the operator should make it available on a wholesale basis to other players. Ofcom has decided that BSkyB will have to cut the wholesale prices for Sky Sports 1 and Sky Sports 2 (its two main sports channels) by almost 25 percent on a standalone basis. The wholesale prices for the two channels bundled together will be reduced by over 10 percent.
    BSkyB’s competitors said the decisions did not go far enough, while Sky was unhappy with having to offer its content to rivals for less. Ofcom policy may make it easier for the likes of Virgin Media and BT to offer sports content in attractive packages to customers. However, the wholesale ruling did not equate to all of BSkyB’s sports channels, and Ofcom has also failed to set wholesale prices for Sky’s movie channels and HD channels, disappointing BSkyB’s rivals. However, BSkyB will have to now offer its HD sports channels on a wholesale to basis to rivals.
    “Today’s decision from Ofcom is disappointing but a step in the right direction. We will at last be able to sell two premium sports channels. We aim to offer Sky Sports1 and 2 at lower prices than those, which have been available. We hope to bring them to the market in time for the new Premiership football season but that will depend on Sky now complying with Ofcom’s decision,” Gavin Patterson, CEO, BT Retail said in a statement. “However, Ofcom should have gone much further than it did. They have dropped movie channels, which should have been included. They should have included all Sky Sports channels, not just two. The wholesale price for the two sports channels is higher than the regulator had previously suggested.”
    Equally, BSkyB was not happy at Ofcom’s rulings either. A BSkyB spokesperson said in a statement, “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.” BSkyB plans to challenge Ofcom’s conclusions before the Competition Appeal Tribunal.
    Edward Hill-Wood, a satellite equity analyst at Morgan Stanley said in a research report, the conclusions of the report could have been worse for Sky. “While the stock market may look at the final Ofcom pay-TV review and conclude that its findings are not as negative as earlier consultation documents might have implied, this is a view that finds little sympathy with BSkyB,” he said.
    Nick Bertolotti, a satellite equity analyst at Credit Suisse said in a report said there were potential “negative implications” in Ofcom’s investigation. “Longer term, we believe the benefit of more wholesale revenue accruing to Sky would be more than outweighed by the negative effect of the loss of their more profitable retail subscribers to competitors which would now have unfettered access, at a lower price, to Sky’s premium content – including HD. Retailers like TopUpTV and BT Vision (and possibly at some time ESPN, although at the moment it has chosen to go the wholesale route for its sport programming via Sky) would be able to get access to Sky’s premium content at more favorable terms and compete more effectively against Sky,” Bertolotti said.
    In terms of the initial impact to BSkyB, Bertolotti commented, “An immediate effect of lower prices, ceteris paribus, would be a hit to wholesale revenues from Virgin Media, which flow directly to the bottom line. Simplistically, a cut to wholesale prices of between 10 and 23 percent applied to Sky’s 2011e wholesale revenues of £235 million ($358.70 million) would equate to £35 million ($53.42 million) less revenues, and an equal flow through to profit, ie a fall of five percent of our 2011e PBT of £755 million ($1.15 billion).”
Hill-Wood says longer-term, Ofcom’s ruling could have an impact in terms of major sports rights. He said in a research report, “A potential negative impact (could be) on Sky’s bidding policy for sports rights. Sky has made the case that its proposed inability to raise wholesale prices will necessarily alter the way it bids for sports rights as it cannot claw back increases via wholesale. This threatens to loosen Sky’s grip on key sports rights.”
    Hill-Wood also believes Virgin Media could be one of the main beneficiaries of more favorable access to Sky Sports channels. “Sky offers a triple play product of TV content, broadband and telephony, where its key advantage is the access to Sky Sports and movies. Virgin can offer faster broadband and similar telephony but an inferior entertainment product. By getting a regulatory decision in its favor, Virgin is able to make the playing field on entertainment more level.”