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Sky Sports pricing dispute: appeal ruling looms

8th August 2012

Tribunal to decide whether to overturn Ofcom order that BSkyB should slash amount it charges rivals for channels

After more than two years of wrangling BSkyB is set to find out whether its attempt to overturn Ofcom’s order to slash the amount it charges rivals to offer its flagship Sky Sports channels has been successful.

The Competition Appeals Tribunal will on Wednesday deliver its ruling on the longstanding dispute, which dates back to March 2010 when Ofcom ordered Sky to reduce the amount it charges rivals for Sky Sports 1 and 2 by more than 20%.

In industry sources do not believe that the CAT will come back with a definitive decision either backing BSkyB, which would mean a dismissal of Ofcom’s pricing regime, or backing rivals by completely throwing out the company’s challenge and refusing it permission to lodge an appeal in the high court.

It is thought more likely that the CAT will seek more information, or a refinement, to the complex “retail minus” mechanism that Ofcom has used to determine the wholesale pricing across BSkyB’s many different retail packages.

In this event the CAT is expected to come back with its final decision in perhaps three months, after digesting the further submission from Ofcom.

During the more than two years of the dispute the difference between Sky’s original wholesale price and Ofcom’s reduced regulated price has been kept in an escrow account. The amount in this account is thought to be more than £25m.

Analysts at Deutsche Bank estimate that £19m relates to what it estimates is about 360,000 customers receiving Sky Sports 1 and 2 through Virgin Media.

Extending the methodology of the bank’s estimates, BT Vision could have more than £7m in the escrow account, on the assumption that it has about 150,000 customers taking Sky Sports 1 and 2.

However another analyst believes that Virgin Media’s Sky Sports base is closer to 600,000, which would mean the total escrow amount is £30m to £40m.

The CAT is not expected to rule on Wednesday that the escrow money will be paid out to either side.

On the other side of the battle are Virgin Media, BT and Top Up TV, which believe the wholesale price cuts forced on Sky do not go far enough.

They will also find out whether lobbying to have the price reduction extended to cover Sky Sports 3 and 4 has been successful. BSkyB’s rivals claimed it could undermine the wholesale price cuts to Sky Sports 1 and 2 by shifting content onto channels not covered by the order.

Ofcom’s original order rejected the notion of having the remedy cover Sky Sports 3 and 4, but the regulator said at the time that the order could be extended if there was evidence of this happening.

Media buying agency Carat has done an analysis, albeit not exhaustive, looking just at Premier League matches played across Sky Sports 1, 2, 3 and 4.

The analysis of last three Premier League seasons has shown no discernable shift in matches being shifted to Sky Sports 3 and 4 to weaken the remedy.

A lot has changed in the market since Ofcom decided that Sky needed to be forced to cut the price of its flagship sports channels to make the market more competitive more than two years ago.

At the time of the order in 2010 the governing bodies of six of the UK’s largest sports – including the Football Association, the Rugby Football Union and the England and Wales Cricket Board – warned of the “serious consequences” for sport and “irreparable damage” at grassroots level of taking money from Sky.

However, this would not appear to be the case with the Premier League, which in June secured a mammoth 71% increase for the TV rights for the next three year period to a record £3bn, thanks to a bidding war between BSkyB and BT.

BSkyB would argue that BT’s £735m bid proves that there is a healthy market for sports rights. BT was the first rival bidder in 20 years to take a prime package of the best Premier League games from the satellite broadcaster.

Virgin Media, BT and Top Up TV also wanted Ofcom’s “wholesale must offer” mechanism to be introduced for BSkyB’s movie channels. This was rejected by Ofcom.

Since then the Competition Commission has conducted an investigation into the pay-TV movie on demand market and BSkyB’s dominance of rights films from the big six Hollywood studios.

The competition regulator provisionally decided that BSkyB’s contracts were anti-competitive and needed to be weakened to allow rivals to flourish.

However in its final decision in May it performed a U-turn and decided to take no action, deciding that the arrival of Netflix, the expansion of LoveFilm and BSkyB’s own Now TV on demand service proved that there was a vibrant market for consumers.

Nevertheless in the final report accompanying the decision the regulator said that it believed that in the overall pay-TV market “competition was not effective”, and that BSkyB had market power over rivals, but that it could take no action as the scope of the investigation was purely on the movie market.

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