UK: Pay TV: Ofcom Begins Review Of The Wholesale Must-Offer

On 16 April 2014, Ofcom announced that it has begun a review of the wholesale must-offer ("WMO") obligation imposed on BSkyB ("Sky") in relation to Sky Sports 1 and 2.

All pay TV operators will be following closely the outcome of (1) Sky's Supreme Court appeal into Ofcom's powers to intervene with pay TV price-setting; and (2) Ofcom's review of the WMO.

The WMO restriction imposed by Ofcom in March 2010 required Sky to offer to wholesale Sky Sports 1 and 2 to other retailers. Ofcom's decision has since been the subject of appeals to the Competition Appeal Tribunal ("CAT") and the Court of Appeal ("CoA"). The Supreme Court is considering an application from Sky for permission to appeal the Court of Appeal's judgment.

Background

Ofcom Pay TV Statement

On 31 March 2010, Ofcom published its final statement concluding its investigation into the pay TV market, following a three year investigation and three consultations. It found that Sky had exploited its market power to restrict the wholesale supply of its core premium channels to other retailers on other platforms. Ofcom found that this was prejudicial to fair and effective competition, contrary to Section 316 of the Communications Act 2003 (the "Act") and therefore reduced consumer's choice.

Ofcom's main concern was that Sky was deliberately withholding wholesale supply of their premium content in pursuit of strategic incentives unrelated to the commercial considerations of revenue and profit maximisation ("Core Competition Concern").

Ofcom was also concerned that Sky's pricing policy revolved around the prices which Sky had set to Virgin Media via its rate-card. In its statement, Ofcom found that the rate-card prices were set so as to allow a retailer with Sky's scale to compete effectively with them, but that there was only room in the market for one such retailer ("Second Competition Concern").

Accordingly, Ofcom imposed the WMO remedy by way of a licence condition in Sky's broadcasting licences whereby the wholesale price for Sky Sports 1 and 2 would be 10.5% below the then current cable rate-card when sold as a bundle, and 23.4% lower than the rate-card when sold on a standalone basis.

CAT Judgment

Sky appealed Ofcom's WMO decision on the basis that Ofcom had no jurisdiction under Section 316 of the Act to impose the WMO remedy. Virgin Media and BT (intervening) argued that the WMO did not go far enough.

In August 2012, the CAT confirmed Ofcom's power under the Act to impose the WMO, but upheld Sky's appeal on the basis that Ofcom's Core Competition Concern was unfounded. The CAT found that Sky had generally engaged constructively in negotiations with other retailers.

CoA Judgment

The CoA granted BT permission to appeal in relation to the CAT's treatment of Ofcom's Second Competition Concern. Sky cross appealed (again) on whether Ofcom had jurisdiction under Section 316 of the Act to impose the WMO condition in Sky's broadcasting licences.

The CoA handed down its judgment in February 2014. The CoA held that one of Ofcom's principal duties in carrying out its functions is to further the interest of consumers in relevant markets, where appropriate by competition. One of those relevant markets must be pay TV. Accordingly, Ofcom had jurisdiction under Section 316 of the Act to impose the WMO.

The CoA was highly critical of the CAT's approach to the competition concerns raised by Ofcom. Although the CAT had considered Ofcom's Core Competition Concern, it had not considered Ofcom's Second Competition Concern in respect of rate-card prices.

The CoA concluded that this amounted to an error of law, such that the CAT's judgment could not be upheld. Accordingly, the matter has been remitted to the CAT for further consideration of the Second Competition Concern.

Next Steps

Ofcom has welcomed the CoA's decision that the judgment of the CAT had failed properly to consider Ofcom's findings that there was ineffective competition in the market.

Sky maintains that Ofcom's 2010 decision is flawed and that the WMO obligation ought to be removed. Sky has applied to the Supreme Court for permission to appeal on this basis.

In light of the fact that the Court of Appeal and the CAT confirmed Ofcom's jurisdiction under Section 316 of the Act, and given its ongoing duty to ensure fair and effective competition in this market, Ofcom has decided to review the WMO. This review will take account of any changes in the market since 2010.

One to Watch

Ofcom is separately considering a complaint from BT under the Competition Act 1998 which alleges that Sky has abused a dominant position in relation to negotiations over the supply of Sky Sports 1 and 2 for BT's YouView platform. BT alleges that Sky's offer to supply those channels was conditional on BT wholesaling BT Sport channels to Sky for retail on Sky's satellite platform.

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