[Huw Williams of NetStrategics asked OfcomWatch to post the following essay]:

In days gone by the big question that Ofcom, and Oftel before it, faced was how to deal with the local loop monopoly of BT. In these days of converged communications, it is now how to deal the effective monopoly that is Sky’s Electronic Programme Guide (EPG).

Ofcom seems to favour open wires far more than open guides.   Look no further than its recent judgement in a dispute between Sky and Rapture Television, a small free-to-air TV provider.  Rapture complained that Sky’s EPG charges were unfair, and asked Ofcom to investigate.  In its usual deliberate way, Ofcom decided that “fair” charges should be between economically calculated floor and ceiling prices.  This left a lot of room for arithmetical arm-wrestling, as the floor was about one-fifth of the ceiling.

So far, so familiar.  Veterans of the telecoms world will recall many such tussles between Ofcom and BT in negotiations over interconnect pricing or the principle of “equivalence”. With BT, Ofcom played hardball, challenging every detail of BT’s costs and twisting every way possible to make the numbers suit new entrants.

Yet in this brave new digital world, Ofcom felt that the Sky/Rapture negotiations had arrived at a fair price - despite Rapture only having any chance of a business model if it agreed to the price Sky demanded.  Sky produced its own “Platform Model”, purporting to show how costs were built up and allocated. But, instead of Ofcom’s spreadsheet jockeys stampeding all over the costs, they concerned themselves with only one item, the Set-Top Box (STB):

“In resolving this dispute Ofcom does not consider that it is necessary to consider in detail either the absolute level of each common cost, or the reasonableness of contributions to common costs of other technical platform services”. (see note 1)

Sky argued that the platform had become successful because of the risks it took in subsidising STBs, and that was why it was now more attractive to companies like Rapture. Clearly having a larger customer base reduces the cost per customer for Rapture, but it does that for everyone on the platform.  What is less clear is why Sky feels that the proportion of costs charged to different players should change — other than simply that it hadn’t put prices up for a while and thought there was now an opportunity to squeeze other players.  And, as Rapture pointed out, the subsidy of an STB expired after 12 months, so Sky had already got its money back.  By agreeing to Sky’s argument, Ofcom has in effect supported the creation of a monopoly position.  Microsoft operating system, anyone?

On almost every point, Ofcom sides with Sky’s argument, even suggesting extra costs to load in. There is no evidence of its analysts having crawled over the “Platform Model2 in the way they rip into BT’s cost models.  Ofcom says that the “willingness to pay” of each channel should determine the actual level of contribution to the cost of STBs.  Remarkably, “even if Rapture had submitted details of its 2004 Business Plan or 2005 Financial Projections to Sky, these would not have provided a compelling argument for Sky to reduce its EPG listing charges in Rapture’s case”. (see note 2)  So, Rapture could choose whether to be either willing or dead.

Why Ofcom should look so much more favourably on Sky’s monopoly than BT’s is much harder to guess.  Perhaps it feels that we already have enough TV channels so there is no need to encourage new entrants, unlike the position in the telecoms world?  Given Ofcom was so keen to introduce “equivalence” between BT and other telecoms providers, maybe it should take its own medicine and apply equivalence between regulatory treatment of telecoms and pay TV platforms?

Note 1:  “Determination to resolve a dispute between Rapture Television plc and British Sky Broadcasting Ltd about EPG listing charges”, (Non-confidential version) 9th March 2007; paragraph 5.37 

Note 2:  Ibid; paragraph 5.57