UK: Do The Competition Authorities Understand The Media Sector?

Last Updated: 27 September 2012
Article by Paul Stone

This note looks at the recent Competition Appeal Tribunal (CAT) judgment in the pay TV case as well as two recent decisions from the OFT and Competition Commission and assesses what they might show about the UK competition authorities' approach to the media sector.

The pay TV case

Ofcom opened an investigation into pay TV in early 2007, following submissions from BT, Setanta, Top Up TV and Virgin Media. Ofcom concluded that Sky had market power in the wholesale supply of premium sport channels and that it had an incentive to limit the distribution of these channels to competitors, in a manner that favoured its own satellite platform. As a consequence, Ofcom decided in March 2012 to vary Sky's licences for its Sky Sports channels under section 316 of the Communications Act 2003. The variations required Sky to offer to wholesale its channels to retailers on other broadcasting platforms at wholesale prices set by Ofcom.

Ofcom's decision was appealed by Sky and a number of other parties to the CAT. The CAT concluded that the basis for Ofcom's core competition concern (that Sky had deliberately withheld from other retailers wholesale supply of its premium channels) was unfounded. The CAT considered that Ofcom had, to a significant extent, misinterpreted the evidence of Sky's negotiations with other retailers. In the CAT's view, the evidence showed that Sky did, on the whole, engage constructively in those negotiations; and that its counterparties did not always do so, with regulatory gaming playing a much more important role than Ofcom recognised.

This is clearly a disappointing decision for Ofcom after such a lengthy investigation of the sector. It is also somewhat surprising that, after so much in depth analysis of the sector, Ofcom's decision was overturned on the basis of its assessment of factual evidence relating to the conduct of commercial negotiations between Sky and other retailers.

So does the CAT's judgment suggest that Ofcom does not understand the media sector? Perhaps the difficulty for Ofcom may have been that it felt that there was a problem in pay TV that it wanted to solve itself, rather than making a market investigation reference to the Competition Commission. This left Ofcom in a situation where it needed to find Sky at fault, rather than being able to point to a market wide issue. Ultimately, the CAT did not criticise Ofcom for its understanding of the sector, but what it read into Sky's actions. It will be interesting to see if Ofcom (or others) decide to appeal the judgment.

Northcliffe/Topper Newspapers

One of the criticisms levelled at the competition authorities by newspapers and broadcasters has been the authorities' failure to understand the impact of the internet on their advertising business. In a recent merger decision, the OFT did take the impact of the internet into account, although not as a direct constraint.

The case concerned the anticipated acquisition by Northcliffe Media Limited of Topper Newspapers Limited. The parties overlapped in the supply of local newspapers and associated websites in Nottingham.

The OFT considered that the evidence on the level of constraint imposed by the internet on the merging parties was not conclusive. In particular, the OFT did not consider that the evidence indicated that other media would actively seek to constrain print media if advertising prices were to rise. However, the OFT considered that there was evidence to suggest that advertisers consider how to split their advertising budgets across different media - and that some had disproportionately cut print advertising relative to other media. This suggested that there was some (albeit weak) degree of competition between local newspapers and the internet.

The OFT's decision does not open the floodgates for arguments that newspaper, television or radio advertising are part of the same market as internet advertising. However, the decision does suggest that the OFT may be prepared to take the impact of the internet into account.

Movies on pay TV

In August 2010, Ofcom decided to make a market investigation reference to the Competition Commission (CC) in relation to the pay-TV movie sector. This was one of the decisions that resulted from Ofcom's pay TV review (see above).

In August 2011, the CC provisionally found that Sky's control over pay-TV movie rights in the UK was restricting competition between pay-TV providers, leading to higher prices and reduced choice and innovation for subscribers.

In May 2012, the CC issued revised provisional findings following the receipt of new evidence and reversed its original findings. In particular, the CC found that the recent launch of new online movie services by Netflix and LOVEFiLM meant that consumers wanting to watch recent movies now had alternatives to Sky Movies. The CC also expected consumer choice to increase further when Sky launched its own Internet-based service (Now TV), which would offer Sky Movies without the need to take any other pay- TV content or subscribe to Sky's satellite platform. The CC's final decision confirmed its revised provisional findings.

It is rare for the CC to reverse its provisional findings in a case. That it did so here may be a reflection of the fast moving nature of the media sector. However, it may also suggest the CC is more open to arguments as to the level of competition traditional broadcasters face from the internet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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