Sky Movies' profits need grounding, says Competition Commission

BSkyB has been accused of making 'excess profits' by the Competition Commission. Oh, the perils of market dominance...

by Dave Waller
Last Updated: 03 Mar 2011
The Competition Commission said today that BSkyB is earning ‘excess profits’ on its movie channels, raising the possibility that the broadcaster might be forced to change how it deals with Hollywood studios and rival providers. But Sky's argument is that it deserves this payback for effectively creating this market in the first place; why should other providers now be allowed to reap the rewards, having taken none of the risks?

We can imagine Sky’s sick of regulators right now. This latest row comes just as the European Court of Justice mulls potentially damaging changes to the way sport’s TV rights work, and as Culture Secretary Jeremy Hunt umms and ahhs over the merits of News Corp’s bid for BSkyB.
 
Here, though, it’s Sky’s dominance of the UK TV film subscription business that’s got the Commission’s cables in a twist. Prompted by Ofcom, the regulator ran an investigation into Sky's exclusive deals with the six major Hollywood studios – NBC Universal, Viacom, Fox, Disney, Sony and Time Warner – and decided that these allow it greater control over what it can charge rivals like Virgin Media to broadcast its on-demand channels like Sky Movies Premiere.

This content is a huge draw for Sky’s pay-TV rivals, because they can attract huge numbers of viewers by offering first-run box office hits soon after their cinema release. Sky is the puppet master in all this – and the fear is that its ability to dictate the market distorts competition and ultimately leads to less choice for the punter.

What's more, the Commission said in a preliminary working paper that the analysis on which its view is based – provided by economics consultancy Oxera – was ‘conservative’, adding that ‘its results are likely to understate Sky's profitability and the profitability gap’. In other words, the situation could actually be even worse than this. And Ofcom is also concerned that Sky may look to extend its dominance to the online video-on-demand sector – a potentially huge growth area.

It did acknowledge Sky's risk/ reward argument, accepting that it was fair enough for Sky to make ‘excess profits’ in its early days because of its ‘significant investment risks’. But, it insisted, ‘we would not expect such profits to persist for a significant period of time’. BSkyB's response will follow in due course, but it's likely to argue that its current profitability is a fair reflection of those past investment risks.

The broadcaster must long for the day when the regulators leave it in peace. But for now, that’s just pie in the Sky.

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