In my Google Alert this morning some madman was ranting on about giving BSkyB a free ride and putting an end to complaints by companies like BT Vision, over wholesale pricing of sports and movies.
The argument was that BT, among others, should stop complaining and get on with marketing and was triggered by the long awaited Ofcom report that Sky must offer lower pricing to other pay TV operators. The reason it ended up on Google Alerts was clearly because all the other copy about the decision was sensible, and this one stood out for being wrong-headed.
Just so we understand, and before commentators reach for their knee jerk reactions, that the market should decide, people have to completely ‘get’ what anti-trust is about. Sky is the dominant UK pay TV service, controlled and part owned by an organization which is one of the global dominant Pay TV forces, News Corp.
As such it ‘knows’ that it can outbid other rivals for high quality live sport and it has contractually tied up many of the latest movies, and it can extract money for that content from a broad international organization. Once it has outbid the market, it owns these products and can squeeze money out of the market any way it likes. The whole principle of only allowing one exclusive owner access to live sports has emerged globally as the preferred method of exploiting live events. It’s not that Sky per se is wonderful and has done a great job of marketing its services, it’s that any pay TV dominant force will ALWAYS tend to win auctions, where the content is seen to be vital. The market leader, however they got to be the market leader, can always extract more money from its customer base and can always afford to bid more, confident that it will not make a loss.
Sure sometimes companies like Sky make a mistake and underbid, but that’s greed and miscalculation ‘ it could have afforded more and the next time around (note how Setanta got annihilated by Sky in the UK soccer negotiations last year), it will put things right. The same thing happened in Germany when Unity Media’s previous owners outbid Premiere for soccer rights. But they are back with Premiere/Sky Germany now.
One of the real issues at heart is that TV channels and TV operators are placed together as a single entity. In markets where a channel is separate from an operator, it has to work with operators to get itself distributed as widely as possibly. When the two are in the same camp, then the TV channel can be used as a lock in weapon, rather like iTunes music store is (was, until MP3 was offered) used to lock people into Apple products.
If you outbid the pay TV market leader in an auction it’s tough then to sell the wholesale rights to the market leader, because it can force your hand in a take it or leave it negotiation and because the regulator usually wants to know what you’re up to. If the market leader does not gain access to the outbid content, a vast majority of people will not see the content and yet they are contractually tied into the market leader for long enough that it won’t immediately have an effect on market share.
When Sky has won auctions for the content, it can easily get what it wants out of the remainder of the market for both sports and for its coveted film channels. In fact it can continually raise the bar ‘ if its rivals can’t agree a price, given time, their customers will churn to Sky, and if they accept an unreasonably high price, Sky has extracted far more from the rights it purchased, than it ever paid.
This is all about monopoly control, and during a time when there are revolutions happening in the European TV market, it is vital that content monopolies are avoided. Why? Because otherwise as companies try to innovate, particularly with new business models, Sky can kill off those innovations and force the status quo on any subsequent market. Over The Top delivery of HD sport would automatically be owned by Sky, and it can strangle profits from any organization that needs live sports content in order to attract attention. In such a market any internet revolution HAS to come from Sky.
In a fairer world live sports should NOT be auctioned to ONE provider. There would be a single professional feed sold to whomever wants it by the owner of the sport, at a non-discriminatory price. But Sky has proved so much more successful at ramping the sports TV price each year than say the Football League authorities managing it themselves directly. The same is true of ESPN and Fox in the US and their respective sports.
Listening to people spout that there is ‘Lots of choice in this market,’ when they are not party to the amounts of money that is paid by wholesalers for each deal, and how Sky can charge one price to a close rival and a lot less to a smaller operator which is snipping at its rival’s heels. That’s not market forces, it’s market manipulation ‘ giving one rival just enough clout to harm another, while your main rivals are running sport as a loss leader.
In a market like that, nothing new will ever happen and we will always pay the amount we are paying for Live sports and movies, and have fewer and fewer choices of what else the pay TV operator offers, because their cash cannot extend to many more deals, once they have laid out an exorbitant fee for the major sports.
So instead of free market rhetoric, people should look at existing anti-trust legislation and how it has been applied over the years, not just in TV rights, but in all forms of supply, including technology, across Europe.
As a general principle, owning control of a broadcast Pay TV market, should not lead automatically to control of a new over the top internet market for content ‘ one monopoly should not subsidize the creation of another. Another general principle is that a dominant supplier should not dictate what rivals pay or put any route to market under pressure not to carry a rival’s service for fear of losing access to the monopoly supplier.
We have seen these principles work with IBM’s supply of mainframes, with Microsoft bundling of media players and even with Intel blocking rival AMD’s chances of access to a fair chip market.
These are just common sense, and it is only paid lobbying that allows any other opinion to be heard, because no amount of moaning can justify it.
The upshot of all of this, predictable as it has always been, is that Ofcom has now put a wholesale price on Sky Sports 1 and 2 on all platforms. The price is regulated and so is its HD version and it must be supplied on ‘fair, reasonable and non-discriminatory terms,’ which means that per home, BT has to pay the same as Virgin Media, which pays the same as Talk Talk TV.
If Ofcom had NOT done this, then a complaint would have been lodged with the European Commission and it would have been far less polite about the matter, and imposed a far reaching fine on BSkyB for the period that it offered discriminatory pricing ‘ up to 10% of its revenues for the period that the pricing was in play ‘ at least a decade. Ofcom has done Sky a favor here.
Put very simply BSkyB was able to stop all other pay TV operators from making a profit by monopolizing vital content that we now know a pay TV service cannot make money without.
Ofcom said, ‘Sky has market power in the wholesale provision of premium channels,’ and also said ‘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.’
Politically this decision has been sweetened by allowing Sky pay services on DVB-T digital terrestrial platforms, which is code for allowing Sky’s Picnic service to go ahead, but only if it accepts its ruling.
However Ofcom is still consulting TV stakeholders in the UK on whether or not the same should apply to VoD Movies and whether or not this should be referred to the Competition Commission.
And Ofcom has already set a price for either one of the two sports channel to be wholesaled at £10.63 ($16) on their own or £17.14 ($26) when sold together. This is a substantial cut of over 20% for the stand alone price, and 10% of the combined price.
Sky has already said that it will appeal to the Competition Appeal Tribunal in the UK, but this is mostly posturing and we reckon this is not only a done deal, but is pretty much how things have gone in the past across the rest of Europe.
For Sky fanboys out there, suggesting that this is like ‘Lada suddenly demanded Porsche supply it with 911’s at a price Lada’s customers can afford,’ is dull to the point of stupidity. BT, for instance, has to supply broadband lines wholesale at a price which relates directly to the cost of its infrastructure, and Sky is a major user of this fixed, interventionist wholesale price. That has been managed by Ofcom and it has resulted in investment and a second wind to broadband in the UK. The same will happen to pay TV.
This is not about bringing down the price of Pay TV so that every home can afford it, but about allowing fairness so that real market forces can operate on the Pay TV market instead of monopolistic control.