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Regulation of Sky's conditional access charges | viewpoint: Nic

The entry below was added by Nicholas Francis on 2 November 2005 as an initial reaction to Ofcom's November 2005 consultation on the regulation of conditional access and related services. See below for links to the outcome of the consultation and Ofcom's current rules (as of May 2009).

Perhaps one miracle of the Oftel era was that the cost-based regulation leading to the micro-management of BT was not followed through to the regulation of conditional access and other technical services associated with pay TV platforms. Ofcom has released a consultation paper today that takes a misguided step backwards.

Ofcom proposes to reduce Sky's flexibility in providing platform services

The consultation paper (66 pages, PDF) concerns proposed new guidelines on the regulation of what Ofcom calls "technical platform services". These are the technical services that the operator of an open access digital TV platform provides to third parties to enable those parties to provide broadcasting and interactive services to the viewer-base of that platform. "Sky" (BSkyB together with its subsidiary SSSL) is the only provider of these services subject to specific Ofcom regulation.

Technical platform services include conditional access services, EPG listing services, regionalisation services as well as various access control services connected with interactive TV. The central feature of these services is that they are used by broadcasters and other operators to offer services on Sky's digital satellite platform in a particular way. For instance, conditional access services allow a third party broadcaster to restrict access to a channel so that only a subset of the households with Sky viewing cards can watch it, thereby enabling it to provide a pay TV subscription service outside Sky's own pay TV packages. And EPG listing services provide a third party with a channel number and schedule information on Sky's electronic programme guide; in general broadcasters will need to procure EPG services if they are to gain any audience on the platform.

The Communications Act 2003 gives Ofcom powers to set conditions for the supply of certain technical platform services, and Ofcom has carried forward regulatory conditions placed on Sky by Oftel. Notably, these require Sky to offer certain technical platform services on "fair, reasonable and non-discriminatory terms". The current consultation paper concerns a substantive revision to the guidelines issued by Oftel on the interpretation of the fair, reasonable and non-discriminatory obligation.

The old Oftel guidelines imply that in determining charges for technical platform services, Sky has a wide flexibility to negotiate terms with individual providers. For instance, on its website, Sky provides a statement] of its method for determining conditional access charges, which includes indicative prices for different categories of service, but emphasises that:

"The method that has been employed is not one that is intended to lead to a deterministic, rigid rate card. The regulatory regime permits [Sky] to enter into commercial negotiations with prospective CA customers rather than develop a rate card. The method that is described in this document is one which [Sky] has used to form a basis for its starting point for negotiations".

The thrust of Ofcom's consultation paper is that the current guidelines provide too much flexibility to Sky, and that this needs to be reduced in the interests of transparency and predictability (paragraphs 4.13 and 4.14).

To meet its "key criteria" of transparency, predictability and practicability Ofcom proposes the following charging structure for technical platform services (paragraph 1.11):

As part of its approach, and to cap the returns to Sky, Ofcom is led into a detailed discussion of possible "cost allocation" methods that Sky could adopt to divide up various costs it incurs (or has incurred) in relation to its platform services business, in order to determine legitimate charges for individual technical platform services, within the charging structure above.

The proposals would sacrifice competition for an easy life

The deep, deep problem with Ofcom's proposals is that they place transparency and predictability above all else. I cannot see how Ofcom's principal duty to further the interest of citizens, and the interests of consumers (where appropriate by promoting competition), enables it to convert the "fair, reasonable and non-discriminatory" condition into the sop to predictability that it proposes.

It is possible to take different interpretations of what fair, reasonable and non-discriminatory means. But Ofcom's starting position must be to look to competition law for guidance. Indeed, Ofcom's consultation paper refers to Annex I (b), Part 1 of the EC Access Directive and quotes the following:

all operators of conditional access services, irrespective of the means of transmission, who provide access services to digital television and radio services and whose access services broadcasters depend on to reach any group of potential viewers or listeners are to: offer to all broadcasters, on fair, reasonable and non-discriminatory basis compatible with Community competition law, technical services enabling the broadcasters' digitally-transmitted services to be received by viewers or listeners authorised by means of decoders administered by the service operators, and comply with Community competition law.

Here fair, reasonable and non-discriminatory is linked closely to EC competition law.

Ofcom seem to think that competition — or at least "range, plurality, quality and appeal" — are best served by predictability and transparency. It provides no convincing reasoning as to why this is the case.

At the same time, the proposals must restrict competition by removing the scope for commercial negotiation between Sky and its potential customers. Channels whose businesses or ideas require technical platform services, but are near the margins of profitability, will be shut out from the market. Sky requires flexibility in its charging arrangements to be able to profitably bring these channels on to its platform.

From a competition law angle, the need for such detailed guidance on Sky's charges would depend on an assessment of the likelihood that Sky will use its dominant position in the supply of technical platform services to engage in anti-competitive conduct. There is a big difference between the scope (or capability) a firm with a dominant position has to infringe competition law (e.g. Article 82 of the EC Treaty) and the risk that it will do so. Often a firm will maximise shareholder value by complying with the law (leaving aside penalties for infringement). At no point in the consultation paper does Ofcom provide any reasoning as to why Sky might face such strong incentives for abuse.

Furthermore, an interpretation of "fair, reasonable and non-discriminatory" derived from competition law would not involve the "recovery of costs" approach discussed in detail by Ofcom. For instance, under Article 82(c) it is simply not necessary to examine the costs that Sky has incurred in R&D and set-top-box subsidies to assess whether Sky has abused a dominant position by discriminating unlawfully between different conditional access customers. It is a comparison of the actual terms offered to different parties that matters – not an absurd pretence that those terms should somehow reconcile with expenditure Sky incurred five or ten years ago.

As it happens, Ofcom's proposals are likely to increase the risk that Sky engages in anti-competitive conduct.

Ofcom's proposals would introduce (or at least maintain, depending on how seriously you take the current guidelines) an implicit price control on the revenue Sky can generate from the provision of technical platform services. The proposals would reduce Sky's ability to extract value from the pay TV supply chain by selling services to third parties such as other broadcasters. At the same time, none of the services that Sky sells to consumers or advertisers face a price cap. This means that Sky will increase its total revenue by reducing the take-up of services supplied on its platform under third-party access models and increasing the take-up up services that Sky provides directly to consumers and advertisers.

This feature of Ofcom's proposals creates clear incentives for Sky to engage in anti-competitive conduct. This risk is not even mentioned in the consultation paper.

There is a real risk that Ofcom's guidelines are adopted

In short, Ofcom's proposals superficially reduce the risk of anti-competitive conduct, by creating transparency, at the cost of creating incentives for Sky to abuse a dominant position.

Sky should be aggrieved that Ofcom has not justified the link between the implicit price control and the "fair, reasonable and non-discriminatory" condition that the guidelines concern. But it is not clear how much it stands to gain by trying to convince Ofcom of the error of its ways. And the proposed guidelines are not binding on Ofcom, so their credibility can be questioned — at least in cases where Sky could justify the costs of a regulatory showdown with Ofcom on this matter.

The real losers are small, innovative channels who will be denied access to the platform — and ultimately consumers. That loss is only expressed by a hypothetical: what could have been; it is barely noticeable compared to the tangible benefits to larger TV companies who would benefit from a clear tariff structure when dealing with Sky. It will therefore not be surprising if the desire for the easy life of transparency and predictability takes precedent over competition.

The deadline for responses to Ofcom's consultation paper is Wednesday 25 January 2006.

Comments? n.francis@reckon.co.uk

Further links

Previous Oftel rules and guidance

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Last changed by Nic at 10:37 AM on Wednesday 13 May 2009.

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Reckon Open "Regulation of Sky's conditional access charges | viewpoint: Nic" 2009-05-13T10:37:49