Virgin Media: Why City A.M. is wrong about TV market

IN his article last Friday about the pay TV market, City A.M.&rsquo;s David Crow suggested that, by forcing Sky to wholesale its premium sports and movie channels to competing pay TV retailers, media regulator Ofcom is punishing Sky&rsquo;s success. He compares Sky&rsquo;s investment in sports and movies to car maker Toyota&rsquo;s investment in hybrid fuel vehicles. Both companies had to go through lean years initially. They took a risk, it paid off and they should be rewarded for it. As a result, Crow argues, the regulator should leave Sky alone.<br /><br />His analogy is superficially compelling but misses the point. Ofcom&rsquo;s proposals are an attempt to inject fair and effective competition into a market that is not working in consumers&rsquo; interests. Sky&rsquo;s overwhelming control of premium broadcasting rights means prices are higher than they need to be, consumers choice of provider is restricted and innovation has been constrained by the limitations of Sky&rsquo;s satellite technology.<br /><br />Sky is a well-managed and admirably entrepreneurial organisation. And of course it has a right to make a return on its investments. But even the most laissez-faire commentator must recognise that there are limits to this principle: investment, no matter how large or sustained, does not confer the right to foreclose competition, control prices or charge a &ldquo;monopoly rent&rdquo;. It is explicitly the role of Ofcom and the competition authorities to monitor the development of markets and identify such situations.<br /><br /><strong>TOYOTAINCOMPETITIVEMARKET<br /></strong>Take a closer look at Crow&rsquo;s comparison and his analogy starts to break down. Toyota operates in the highly competitive global car market where consumers face an abundance of choice and competition between different manufacturers is fierce. Sky operates in a market where it controls virtually all premium pay TV channels and restricts the distribution of those channels. This has resulted in what Ofcom has called &ldquo;a detrimental effect on consumers, in the short term by reducing choice and in the long term by dampening innovation&rdquo;.<br /><br />Without intervention, the pay TV market will be stuck in a vicious circle. Thanks to its overwhelming control of premium pay TV channels, Sky has accumulated around eight times as many premium subscribers as all its competitors put together. This fundamentally affects the economics of rights auctions because Sky knows it can monetise any rights it purchases far quicker than any competing pay TV operator. <br /><br />In short, the way the market is currently structured gives Sky an in-built advantage in any rights auction. This has led to the self-perpetuation of Sky&rsquo;s dominance.<br /><br /><strong>CONSUMERSARETHELOSERS</strong><br />To make matters worse,&nbsp; auctions of key sports rights do not happen simultaneously but are staggered over many years. So even if another company did outbid Sky for one set of rights, there is no realistic chance of developing a genuinely substitutable proposition to Sky, as both ITV Digital and Setanta found out. <br /><br />Sky often says that all anyone has to do is &ldquo;invest in sport&rdquo; to compete. But the market as currently structured provides no rational economic case for any other pay TV operator to outbid Sky. The losers in all this are consumers who are paying high prices, and missing out on the benefits that competition would bring.<br /><br />Nobody objects to businesses profiting from innovation and entrepreneurship. Toyota deserves its success with the Prius. But imagine if Toyota had secured exclusive deals with key component manufacturers which prevented any other manufacturer making comparable cars and simultaneously refused to let any other business retail its cars. Action would be needed to protect consumers in such a market. That is why Ofcom is proposing to intervene here. Not to punish success but to remedy a market that has failed.<br /><br />Neil Berkett is CEO of Virgin Media