Ofcom Pay TV market investigation — some random observations…

I finally got around to reading the huge Ofcom consultation on the Pay TV market. Here are my random observations:

– Generally speaking, everyone has been saying that Ofcom since its inception would eventually tackle the ‘three Bs’: the BBC, BT and BSkyB. This investigation, combined with the Sky DTT Picnic Application and the debate over the ITV stake, looks like part of that broader game. So far, any reasonable observer would have to conclude that Ofcom haven’t really dented the armour of the two other Bs. We’ll see if they fare any better with BSkyB.

– Ofcom basically find no evidence of wrongdoing on the part of BSkyB. Ofcom also find that the Pay TV market serves consumers well. Finally, Ofcom note that things are changing — IPTV will soon affect the market and Freeview went from zero to 9.3 million subs in a handful of years. (and the BBC will launch Freesat in 2008) So why indulge BT and Virgin Media with an investigation? In other words — where is the harm when the mega-rich battle the super-rich? Those nuggets which form the rationale for the consultation are the most oblique and passively-worded parts of the document. Here are a few:

‘We may have competition concerns where aggregation of content by a particular provider leads to the creation of market power. However, aggregation of content into service bundles is also likely to result in efficiency gains, which may benefit consumers. There is a risk that any intervention to prevent bundling per se could undermine these efficiency benefits, and therefore be counter-productive.’

‘However, if any market power which results from content aggregation can then be leveraged into other markets, then this is likely to produce additional competition concerns without any compensating efficiency benefits. Such leverage is likely to be of particular concern from a competition perspective.’

In essence: ‘If X were to occur, and countervailing Y benefit does not follow, then it is likely that Z might happen, and we might be concerned under certain circumstances…‘

– Ofcom’s investigation of the Pay TV market omits any significant mention or analysis of the BBC. Ponder that for a moment. The state-owned BBC, supported by the licence fee, is the biggest pay TV provider in the UK. The BBC uses public money to acquire movies and sports rights, listed events, etc. Ofcom does mention a few times that BBC content is the most valued by Pay TV viewers. Still, for this investigation to be more robust in its findings, I think it would be required to assess how the huge amount of public money in broadcasting — supporting a massive advert-free content provider with certain PSB rights — affects the overall market.

– I thought Ofcom poorly glossed over the DVD-as-substitute for premium movies issue. I’m a Sky Plus subscriber with sports access but no premium movies subscription. Why? DVDs, iTunes, the cinema. They are very good and useful substitutes. So useful, in fact, that like one-third of Sky subscribers I don’t get Sky movies. Ofcom claim by contrast:

‘However, 70% of consumers of pay TV subscription services value films being available at all times. Such consumers clearly value the convenience of a broadcast subscription service, and are unlikely to regard a DVD purchase or rental as being a close substitute.’

That’s a very weak analysis. The 2006 numbers paint the exact opposite picture:

(1) DVDs: 1655 million GBP; (2) Pay TV movies: 673 million GBP; (3) Cinema: 649 million GBP; and (4) Internet / On-Demand: 84 million GBP. The DVD market is over twice the size of Pay TV movies.

– I was disappointed for Ofcom not to fully appreciate the dynamic nature of this industry and the limitations of its own powers of prediction (which it cheerfully did in the DDR when such an approach supported spectrum auctions). Disney recently announced, for example, that it would be interested in bidding on FAPL rights in the future. And certainly nothing stops anyone out there from competing for premium movie rights. And the BBC will supposedly launch Freesat in March 2008. Add-in Microsoft, iTunes, other newer forms of distribution and content creation and you definitely get the feeling that Ofcom should be very wary of intervening where it cannot possibly predict the future market.

– This Pay TV market investigation says much about Ofcom’s priorities in 2007. Consumer groups, the Ofcom Consumer Panel, this blog and countless other consumers and techies were screaming in 2007 for Ofcom to do something about the state of broadband, particularly service, advertising and speed issues. Thousands upon thousand of people where telling Ofcom and other policy makers to look more closely at the consumer experience with broadband. Apart from repeatedly telling everyone how fast and affordable broadband in the UK was, Ofcom really had its head in the sand until just a day or two ago when it finally responded to the Ofcom Consumer Panel and said it was looking into the matters raised by the panel’s chair, Collette Bowe. By contrast, Ofcom acted with great alacrity to the complaint by BT and Virgin Media about BSkyB.

Ofcom got its priorities badly wrong in 2007.

– Stay tuned…