And lo, it came to pass that Ofcom has – after over 2 years - concluded that Sky does have too much power in the Pay TV market and has to be strong armed into playing fair.

Ofcom is now consulting on proposals requiring Sky to wholesale designated premium channels - Core Premium Sports and Movie channels - on regulated terms – including price.Ofcom believes that requiring Sky to make its premium channels available to other retailers on a wholesale basis is the most appropriate way of ensuring fair and effective competition

According to Ofcom, whilst Sky says it is happy to provide these channels to anyone who wants them, the term on which Sky offers them are so prohibitive as to make the deal make little financial sense to the third parties. According to Ofcom:

“Sky currently supplies its Core Premium channels to only one major third-party retailer, Virgin. Sky appears to believe that it is under a de facto requirement to supply Virgin due to previous competition cases. From our review of Sky’s own statements, our view is that its prices to Virgin appear not to be based on a commercial calculation (e.g. weighing higher prices against greater sales volumes), but rather on Sky’s view as to the highest price it can charge without coming into conflict with the OFT’s 2002 margin squeeze test. At the current wholesale charges, Virgin makes an incremental loss when it sells premium channels to an existing basic subscriber.”

Ofcom also points out that evidence shows that when approached about wholesale deals, Sky usually tries to get a retail deal, so it can retail directly to subscribers on the third party platform instead.

Sky obviously thinks it is being penalised for its commercial success, and for taking the risks of setting up its business. It has a point. However, there is also little denying that if Ofcom’s evidence of Sky’s unwillingness to negotiate wholesale deals in good faith is true; making it almost impossible for rival platform providers to buy any of its premium content, then it has little choice but to step in.

Sky would no doubt argue back that if third party platform’s know they can get football and films from Sky in wholesale deal on regulated prices, why would any of them bother to bid against Sky for the rights to these things. The Premier League are certainly worried that their cash cow could be effected.

The problem Sky and indeed any company that is both a wholesale buyer and a retail seller of services has is demonstrating how the different costs its charges its own retail business verses what it offers to sell that same content to other third party retailers is justifiable. This was part of the reason BT was split up and why other incumbent telcos are being forced down the same path.

Ofcom points out, that Sky should look for the silver lining in all this, and realise that it could make £250m a year from new wholesale deals, which would help cope with any potential loss of direct subscription income.

One thing is for certain, and that is that anyone expecting this to be resolved quickly would be mistaken. Sky will appeal any decision to the CAT and to the Courts in an attempt to delay any action which forces them to offer their content on FRAND terms.