Media: All about ... The pay-TV market

With Virgin squaring up to Sky, Alasdair Reid asks who will emerge on top.

Richard Branson has a track record of taking on market leaders. His Virgin Atlantic triumphs against British Airways, for instance, were rightly celebrated, especially as the public began to appreciate the depths to which BA was prepared to stoop in its dirty tricks campaign.

He now has a similarly ambitious target in his sights, BSkyB. Having acquired ntl's and Telewest's cable TV and broadband businesses, Branson has managed to galvanise opposition to BSkyB, and once he had persuaded BT (which has entered the video-on-demand market) and Setanta to rally to his cause, it was simple to persuade Ofcom to launch an investigation into the workings of the pay-TV market, including the subscription and video-on-demand services on cable, satellite, digital terrestrial and internet-delivered platforms.

Especially as BSkyB is already facing two other inquiries, both of which were set in train by Branson. The first is an Office of Fair Trading investigation into BSkyB's move to stymie a Branson bid to take over ITV. To observers, BSkyB's raid back in November 2006, when it grabbed a £17.9 million blocking stake in ITV, seemed a transparent and somewhat desperate measure.

And that OFT investigation has, in turn, triggered a widespread public interest inquiry (led by Ofcom at the instigation of the trade secretary, Alistair Darling) into the combined influence of all Murdoch-controlled media, not just in television but across the national press, too. Perhaps the balance of power in the pay-TV market is about to shift.

1. The heart of this matter is the price that BSkyB, in its role as a content provider, charges rival digital distribution platforms for carrying its channels. Virgin Media's submission to Ofcom states that BSkyB was seeking to double (to £48.5 million) the fee payable for the carriage of a package of its basic channels, including Sky One and Sky News. When negotiations broke down, the channels were withdrawn by Sky on 28 February. Separate to its Ofcom lobbying, Virgin has vowed to take Sky to the High Court if the dispute is not settled by the end of March. An initial hearing could take place this week.

2. Following its assessment of submissions from all parties - including consumer interest groups, adland trade bodies and a range of media owners, as well as BSkyB and Virgin - Ofcom will rule on if it will refer the matter to the Competition Commission. Ofcom's investigation will be concerned with all features of the pay-TV market "including control over content, ownership of distribution platforms, retail subscriber bases and vertical integration". It will also assess the impact of developments such as BSkyB's proposal to launch a new pay-TV service on Freeview, a move likely to increase its dominance of the sector.

3. If BSkyB is found to have been abusing its position, then the notion of vertical integration will be the main issue to come under scrutiny. The Competition Commission would be forced to rule on whether or not content production and programme rights ownership should be separated from the distribution side of the business.

4. If integration were to be outlawed, BSkyB would have to be split into two separate operating companies. And equally, Virgin would have to dispose of its UKTV interests - and it could also forget any future bid for ITV.

5. But BSkyB is skilful at seeing off regulatory troubles. In 1994, the cable industry complained to the OFT about the terms of supply of Sky programming. The inquiry halted when Sky agreed to produce a public ratecard. In 1995, the OFT came back to the issue. This time, Sky promised "non-discriminatory access" to its channels.

6. But its greatest triumph came in 2002. On 17 December 2001, the OFT issued a notice ruling BSkyB had been acting in an anti-competitive manner. A hefty fine would have followed. But, as required by law, BSkyB was given the chance to respond. It did so, and a revised ruling, issued exactly a year later on 17 December 2002, stated: "Allegations that BSkyB unlawfully distorted competition in pay-TV called for investigation. We have concluded BSkyB is dominant in the supply of premium channels. On the key issue of the alleged margin squeeze against its rivals, we found BSkyB to be around the borderline of anti-competitive behaviour. There isn't sufficient ground to conclude BSkyB has broken competition law."

WHAT IT MEANS FOR ...

MEDIA OWNERS

- A radical ruling by Ofcom and the Competition Commission, leading to the break-up of BSkyB into two operating units, would be the biggest upheaval seen in British broadcasting in more than a decade. But, ironically, the greatest casualty of a ruling against vertical integration could actually turn out to be Virgin. Its ambition to be a major player on the content side (particularly through ownership of a major network such as ITV) would be killed stone dead. So, taken in the round, Virgin and Sky might begin to realise it's in both their interests if they move towards a last-ditch (Ofcom-approved) compromise. The BBC will feel smug satisfaction as it observes from the sidelines.

ADVERTISERS

- The superficial view is that this is an issue of peripheral interest to advertisers. However, reports suggest that Sky One's audience has fallen by as much as 34 per cent since being withdrawn from Virgin Media. And, as Jim Marshall, the chairman both of Starcom and the IPA's Media Futures Group, points out, the pay-TV sector is disproportionately important for the evolution of the TV medium as a whole. "Almost by definition, pay-TV is the most desirable first-run content, and advertisers should always be interested in the opportunities to access the best content. So it is in no-one's interest to see pay-TV dominated by one party, particularly when it's a company that, historically, has placed a low reliance on advertising as a source of revenue," he says.