For Broadcast October 01, 2008

How is Ofcom going to regulate carriage of Sky's premium channels?

The fight between Sky and the so-called Gang of Four (BT, Setanta, Virgin Media and Top-Up TV) has finally got down to the nitty-gritty - how much the satellite giant charges other platforms for its Premier League football and Hollywood movie channels.

Following 21 months of enquiry, Ofcom's pay-TV consultation report says Sky has "market power" which is stifling consumer choice and so is proposing Sky be forced to make its premium TV channels available to its competitors at "regulated wholesale prices".

The regulator is suggesting that Sky's wholesale prices for football and film channels should follow a "retail minus" approach, in which Ofcom compares how much Sky charges the other pay-TV operators for the services in relation to what it is able to charge consumers for those channels.

This will likely be informed by a "cost-based analysis" of Sky's channels, so what it spends to put the movie and sports channels together can be measured against what it charges the other operators.

The irony is that the ultimate pay-TV risk-taker Rupert Murdoch is being reined in to help platforms which did not take the same risks.

This is far from a victory for Sky, but it could have been worse: the Gang of Four were at one point saying Sky's wholesale and retail businesses should be separated, which would have changed its whole business model.

Ofcom says Sky's margin on its wholesale premium channels is "higher than Sky's 2008 operating margin of 15.2%". The implication is that the wholesale margin is too high, but why shouldn't a wholesale margin be higher than an overall operating margin?

And Sky would argue it's the Gang of Four's pricing packages - its bundling bungling - that has caused the consumer to lose out. Expect the next round of carriage negotiations to be as fraught as ever.