Branson tosses fat into the fire as ofcom moves to curb bskyb

Late last week, Sir Richard Branson, founder of the Virgin Group, made a timely guest appearance in the Financial Times. He was starring in the twin role he plays best – professional underdog and consumer champion. In a persuasive article, he laid out the case for dismantling BSkyB’s virtual monopoly of the UK pay-TV market.

He made an interesting analogy between British Airways’ conduct before 1990 and BSkyB’s now. Only after the government loosened BA’s grip on the premium route between Heathrow and the US, by allowing Virgin Atlantic to set up in competition, did real benefits begin to flow through to the consumer, alleges Branson. Prices fell, there was more choice and airlines (including BA) had to innovate and provide more attractive services.

How does this relate to BSkyB? Well, the Murdoch-dominated TV group makes much of its money from selling premium subscription football and first-run Hollywood movies, the rights to which it charges dearly for and jealously protects. Anyone else operating in this sector is cowed by BSkyB’s market power, and is forced into accepting the best premium content available on terms and prices dictated by the dominant incumbent.

If Ofcom, the media regulator, would listen to reason and break up this monopoly by forcing Sky to offer its channels to the competition at “reasonable prices”, all manner of goodies would flow to the consumer. There would be much more choice for those without satellite access, or who wanted some but not all the channels offered in current Sky subscription packages and, best of all, prices would come down.

Implicit is the suggestion that Virgin Media (which Branson founded and in which he remains a significant shareholder) would be the principal catalyst of these changes, just as Virgin Atlantic was with BA.

That’s as may be, but the fact that Branson’s argument has large elements of self-interest doesn’t invalidate it. There is, indeed, a spooky coincidence between what Branson is proposing and what Ofcom published as a consultation document in June.

That’s no great surprise because there appears to be an axis of interest between the two on the matter of BSkyB and its market power.

ranson was understandably incensed when James Murdoch, then chief executive of BSkyB, crippled his media empire-building strategy in November 2006 by acquiring a pre-emptive 18% stake in ITV. Ofcom was all for investigating the investment, but the matter was taken out of its hands by the Competition Commission (which did indeed rule that Sky should divest a large part of it). The following year, Ofcom announced that it was to investigate whether Sky exercises undue power over the UK pay-TV market. Proponent of the idea? One R Branson.

I’m in no way suggesting Ofcom is in the pocket of Branson. BT Vision and Top Up TV – the UK’s other provider of pay-TV services – also complained to the regulator (though one suspects Branson was the ringleader). And there has been a crescendo of propaganda over the past few months from all parties, including Top Up TV chief executive David Chance and BSkyB chief executive Jeremy Darroch, designed to bend Ofcom’s ear as it prepares to deliver judgement on the matter.

The real issue here, surely, is not whether Sky has too much power, but whether Ofcom’s proposals to dilute it would in reality give the consumer more choice.

The real issue here, surely, is not whether Sky has too much power, but whether Ofcom’s proposals to dilute it would in reality give the consumer more choice.

The first thing to bear in mind is that the parallel Branson draws between BA and BSkyB is somewhat misleading. BSkyB was not gifted its market-dominant position, it built the sector itself – risking shareholder funds as opposed to relying on generous public subsidy (the case with BA before privatisation in 1987).

Understandably, therefore, it is miffed at the idea of having to hand rivals the fruits of its labours at a regulated discount. In the words of Darroch: “BT and Virgin Media do not deserve to be handed a reward at Sky’s expense for their repeated failure to invest. It defies belief that Ofcom expects Sky to lower its wholesale prices to compensate for the higher costs of less efficient platforms.”

Sky, which has been a significant driver of innovation – with Sky Plus and HD television for example – will be a lot more wary of future investment if it thinks the benefits are going to be creamed off by its “undeserving” competition.

More worrying is the possibility that Ofcom will end up replacing an imperfect market with a false one. If it goes ahead with its proposals, it will have a vested interest in trying to ensure the new regime works, regardless of market forces. This is certainly the view of Professor Martin Cave, a former Competition Commission member and adviser to Ofcom, who was commissioned by Sky to produce an “independent” report.

He concluded: “The designation of what may well turn out to be a single new competitor [Virgin Media] risks creating a co-dependency between the regulator and that competitor, with the competitor focusing its efforts on influencing the regulator and the regulator ‘protecting’ its reputational investment in the competitor.”

That, of course, is only his opinion. Mine is this. Branson is right that an enfranchised Virgin Atlantic brought significant consumer benefits. But such consequences do not inexorably flow from deregulation.

Consider the case of Mercury Communications. This, too, was designed to promote competition and consumer choice, in the wake of fixed-line monopolist BT’s privatisation in 1984. By the mid-Nineties it was in serious trouble; by 1997 it was, to all intents and purposes, dead. One reason it failed was because it had to rely on BT infrastructure; in just the same way that Sky’s enfranchised competitors would have to rely on a market structure shaped and driven by Sky.