Sky dominance of pay-TV movie market does not adversely effect competition after all, Competition Commission says

The influence that LOVEFiLM and Netflix have had has been to provide greater consumer choice over where to find movies being first shown on pay-TV services, the Commission said.

Sky's own response in announcing an imminent rival service as well as its decision to drop the price of package deals incorporating its pay-TV movie channels has also caused the Commission to revise its view on whether Sky is too dominant in controlling the ''first subscription pay-TV window' (FSPTW) rights for films. The Commission has been investigating whether Sky is too dominant in the market.

In August the Commission had made a provisional finding that Sky's control over rights to show films first on pay-TV was too powerful. It had said the lack of competition disadvantaged consumers. However, it has now changed its opinion (347-page / 1.67MB PDF) after noting changes to the market landscape.

"We have reached the revised provisional finding that Sky’s position with respect to the acquisition and distribution of FSPTW movie content on pay TV does not adversely affect competition between pay-TV retailers," the Commission said. "Further, we remain of the view that no [adverse effect on competition] arises in the upstream market as a result of Sky’s position with respect to the acquisition of FSPTW movie rights."

"Accordingly, our revised provisional finding is that there are no longer features relating to ‘the supply and acquisition of subscription pay-TV movie rights in the FSPTW of the major [film] studios’ or ‘the wholesale supply and acquisition of packages including core premium movies channels’ which give rise to an [adverse effect on competition] in any market," it said.

The Commission said that the presence of LOVEFiLM and Netflix in the market for film rights had shown that it had previously overstated the barriers that internet-based companies face to acquiring FSPTW content rights. It said it expects the firms, or others like them, to eventually be able to outbid Sky for FSPTW rights awarded by the six major film studios which would further diminish the barriers facing those kind of firms.

"We have observed that both LOVEFiLM and Netflix have each acquired FSPTW content from non-major studios," it said. "On the basis of the evidence now available, it appears to us that, although Sky continues currently to have an advantage when bidding for rights due to its large incumbent subscriber base, this advantage is less when comparing Sky’s position with [internet-based service] pay-TV retailers than when comparing it with other traditional pay-TV retailers (due to their differing business models)."

"Furthermore, [internet-based service] pay-TV retailers have demonstrated a willingness to incur risk in order to establish a position in the market for the long term. As the customer bases of these providers increase (as we expect will happen), their relative level of risk in bidding for content compared with Sky will diminish, which will erode further the barriers to them bidding effectively against Sky for more rights. It appears to us that there is a realistic prospect that an [internet-based service] pay-TV retailer will be able to outbid Sky for the FSPTW rights of at least one major studio in the future," it said.

Another development since its provisional findings was Sky's announcement that it too was to launch a rival internet-based film service to LOVEFiLM and Netflix. This means that consumers would not be too reliant on having to buy "bundled" packages from Sky in order to see FSPTW content, the Commission said.

It also said that it had misconstrued the value that consumers themselves place on see recent movies on pay-TV services. It said factors other than "recency" also drive consumer choices in the market.

"We still think that FSPTW content is significant to the appeal of Sky Movies, in part because it reflects the emphasis that Sky itself puts on offering recent movies as one of its key differentiating factors," the Commission said. "However, the fact that consumers attach importance to other attributes of pay-TV movie services as well as recency (eg price and the range of content) means, we believe, that another movie service can be a reasonable substitute for Sky Movies on the basis of all attributes taken as a whole."

There is still "ineffective" completion in the overall pay-TV retail market, the Commission said, but it said its investigation was only limited to the "impact of FSPTW movies".

"'For the purposes of our inquiry, the key effect of the market developments is that, as a result of the new options available to them, consumers’ choice of pay-TV platform can more easily be decoupled from their choice of pay-TV movie service," Laura Carstensen, chair of the Commission's 'Movies on Pay TV' market investigation, said in a statement. "As a result, Sky Movies no longer provides Sky with the advantage that it used to when competing with other traditional pay-TV platforms, like Virgin Media or BT Vision."

"Given that we no longer find there to be an adverse effect on competition in relation to movies on pay TV, we are not now proposing any remedial action," she said.

Stakeholders can comment on the Commission's revised provisional findings between now and 13 June after which the body will publish its final views.

The Commission is an independent public body that is tasked with considering whether market competition conditions in the UK are healthy and the impact those conditions have on consumers and the economy. Both UK and EU competition law prohibit businesses with significant market shares unfairly exploiting their strong market positions.

In August 2010 the Commission was asked by communications regulator Ofcom to investigate the "supply and acquisition" of movie rights within the subscription pay-TV movie market. Ofcom also asked the Commission to look into the "wholesale supply and acquisition of packages including core premium movies channels". This followed a three-year study by Ofcom into the pay-TV market.

Under the terms of the UK's Enterprise Act Ofcom can refer competition matters to the Commission for investigation if it has "reasonable grounds" to believe that competition laws may have been breached.