Clouded judgement is behind regulator’s proposals for Sky

Regulators’ remedies for offering good consumer services while maintaining fair competition frequently miss the mark – and Ofcom’s plan for Sky is no exception

Ray Snoddy

WC Fields always swore you should never give a sucker an even break.

Maybe it’s time to consider whether we should stop giving media regulators an even break. Instead they deserve a good kicking for the glacial speed at which they produce hundreds of pages of mind-numbingly dull consultations or rulings that are not in the long-term interests of consumers. Whether it’s Ofcom or the Competition Commission there’s no denying they observe due process. Oh how they observe due process – before coming to eccentric judgements that represent massive interference with the functioning of free markets.

Take Ofcom’s recent magnum opus on pay TV – which with unfortunate timing came out just after Setanta finally bowed out in favour of the Disney-owned ESPN – bringing serious competition for Sky on Premier League football rights for the first time.

So why does Ofcom now want to create a “wholesale ‘must-offer’ obligation” for Sky but also to set prices around 30% lower than the current level?

The absurdity goes further. According to a new Ofcom-commissioned study, Sky is “earning aggregate returns in excess of its cost of capital”. A devastating accusation to face, except that such returns are usually called profit and that’s what companies normally do.

With live sports rights there is the additional problem that competition – normally a good thing – can often considerably disadvantage the consumer. Split up the rights in different packages to promote competition and you get duplicated production costs and multiple subscriptions for viewers.

But let’s give Ofcom chief executive Ed Richards a fair hearing. More can be done, he believes, to extend choice and competition as well as keep costs down. And anyway, he adds, no one is actually losing out on live games. The new packages to be marketed by ESPN over the next four years are in addition to those originally available on Sky.

As Richards pointed out last week at a broadcasting conference, Sky’s rivals such as BT and Virgin wanted to see the satellite broadcaster actually broken up. But Ofcom has kindly decided that would be too extreme a remedy and is calling only for the wholesale rate cut.

Sky chief operating officer Mike Darcey knew exactly what to make of that. Apart from repeating the BSkyB threat to sue the ass off Ofcom, Darcey issued a stark warning that no one should assume that Sky would continue to take the risk of investing £1.3bn a year in content and rights if it was unable to make what it sees as a reasonable return.

“This is a proposal for subsidies for BT and Virgin at our expense,” harrumphed Darcey.

The Sky executive was also able to point to BSkyB’s record of innovation – from digital television itself to personal video services and high definition viewing.

These developments didn’t happen by accident and as Caroline Thomson, the BBC’s chief operating officer, noted rather pathetically, the success of HD has taken the Beeb by surprise. Which means that of the total 33 HD channels now being broadcast, Sky is 31 channels ahead of its nearest rival.

As for trying to nail Sky to wholesale prices, Darcey denounced the idea as akin to the industrial planning of the 1970s.

If Ofcom gets its way this may be another case of strengthening the competition at the expense of the quality of service the consumer actually receives.

The recent activities of the Competition Commission deserve even more ridicule. For obvious reasons, ITV and Channel 4 are in a parlous state. So what did they do about it? They tried to help themselves by joining up with the BBC to launch project Kangeroo, the on-demand television service. That is, until the Competition Commission got in on the act and blocked the venture. The danger, the commission’s reasoning went, was future potential harm – not actual harm – to new emerging ventures. It was judged that a combination of the BBC, ITV and Channel 4 and their programme libraries amounted to market dominance.

The absurdity goes further. According to Ofcom, Sky is ‘earning aggregate returns in excess of its cost of capital’. A devastating accusation to face, except that such returns are usually called profit and that’s what companies normally do.

This totally ignored the power of largely unregulated Google, YouTube, Facebook and above all online TV service Hulu, which has plans to come into the UK market soon. You almost despair at such narrow thinking.

So, as a result, public service broadcasters seem to be prevented from developing new streams of revenue to protect original British production and genres such as regional news, despite this being a central tenet of Government media policy.

A sure case of one arm of officialdom undermining another, forcing the Government into a top-slicing of the BBC licence fee mode.

But due process has been followed – and an opportunity lost – all in the interests of preserving a theoretical definition of competition.

Neither has the commission exactly helped the regional newspaper industry on mergers. By drawing markets in a very narrow way and largely ignoring the impact of competition from the internet and the likes of online classified service Craigslist, it has brought the industry to its knees.
I think we should give WC Fields’ message a modern twist, and say “never give a regulator an even break”.

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