A guide to the Sky v BT Sport Ofcom investigation and Competition Appeal Tribunal decision

Published 27 January 2015 | Authored by: Alex Haffner

 

It is well known that BT Sport has competed aggressively with Sky for sports rights over the past few years and that this has had important implications for fans in terms of where they watch their favourite sports. However, equally important to the way in which sports content is made available to TV viewers are the various "off the pitch" legal battles that BT Sport and Sky have been fighting, in particular following Ofcom's decision to impose "must offer" obligations on Sky to make available its Sky Sports 1 and 2 channels to other broadcast platforms.

A decision towards the end of last year by the Competition Appeal Tribunal (CAT)1 to expand the scope of the must offer obligations to ensure BT YouView customers get access to Sky Sports 1 and 2 appears to have given some of the initiative to BT.2 However, as explained below, the battle is far from over and the next 12 months are likely to bring further twists and turns on various different fronts.

The Ofcom “must offer” Remedy

As long ago as 2007, the UK broadcast regulator Ofcom announced it was going to investigate the extent of Sky's market power in the supply of premium content channels, notably sports content. Three years later, Ofcom decided that Sky should be forced to make available its core sports channels (Sky Sports 1 and Sky Sports 2) to competing broadcast platforms, a remedy which has become known as the "Wholesale Must Offer" or "WMO".3 Ofcom's decision was based on the perceived importance of those channels in enabling pay-TV operators to compete for subscribers with Sky and the fact that, absent regulatory intervention, Sky might not necessarily be incentivised to make them available to its competitors on reasonable commercial terms. The WMO remedy is extremely valuable to those rival platforms since not only does it guarantee access at a regulated price (calculated on the basis of Sky's published retail prices less an agreed margin) but also Sky is forced to wholesale its channels, thereby allowing other platforms to market them to their customers as they wish.4

Unsurprisingly, Ofcom's decision prompted a furious backlash and an appeal to the CAT by Sky (supported by a number of sports rights holders concerned at the impact of Ofcom's intervention on the value of their broadcast rights). BT and Virgin both intervened to back up Ofcom, but also sought a widening of the must offer remedy to encompass Sky's other main sports channels.

Early on in the proceedings, Sky agreed with BT and Virgin that it would give effect to the Ofcom must offer remedy pending the final outcome of the appeal proceedings. This gave rise to the Interim Relief Order (IRO), which required Sky to supply the core sports channels to "qualifying platforms" at the Ofcom regulated price provided the platform owners paid into an escrow account the difference between that and the price they would have paid for wholesale access to the channels under Sky's commercial rate card. The idea was that, should Sky ultimately prevail, it would be put in a similar financial position to that it would have been in without the Ofcom remedy. The terms of the IRO and the recent decision by the CAT to amend its terms (at least until the CAT reaches a decision on the substantive proceedings) are considered further below.

The IRO is, as its name suggests, an interim measure and the substantive appeal proceedings have yet to be finally determined. Sky originally prevailed at the CAT which found that the Ofcom decision should be overturned.5 However, BT then appealed that decision to the Court of Appeal, which agreed that the CAT had overlooked a key justification for the original Ofcom decision and was therefore duty bound to reconsider the matter.6 Sky was recently refused permission to appeal that decision at the Supreme Court meaning the matter is now back with the CAT pending a further hearing of the case (which will likely take place next year).

The scope of the IRO in relation to BT

At the time of the original Ofcom decision, BT provided its TV customers with a set-top box that predominantly relied on transmission via digital terrestrial television (DTT). The IRO therefore provided for Sky to supply its core sports channels to BT on a DTT-only basis.

Subsequently, BT developed YouView with various other broadcaster/technical partners and launched its own version of the platform in October 2012. YouView set-top boxes rely predominantly on delivery of content over broadband enabled Internet, known as IPTV. YouView has since become BT's preferred delivery platform particularly as it can take advantage of its fibre network to make available a better content offering to consumers.

Unfortunately from BT's perspective, the IRO on its original terms did not allow it to gain access to Sky Sports 1 and 2 on YouView. It therefore attempted to negotiate terms with Sky, whose commercial position was that it was only prepared to provide wholesale access if BT granted reciprocal wholesale access to its BT Sports channels. BT steadfastly refused to accept that condition as it already makes available its channels to Sky customers on a "self-retail" basis. This means that those Sky customers obtain the channels from BT (currently at no extra charge if they already take BT broadband ) who is therefore able to market its services directly to them. Clearly Sky wanted to make sure that it was not in any worse position than BT in terms of its ability to manage the channel subscriber relationship.

 

Amending the IRO: second time lucky

BT has explored all available legal avenues to force Sky to agree to wholesale its channels for the benefit of its YouView customers. One of those was to issue a formal Competition Act complaint to Ofcom arguing that Sky's behaviour amounts to an abuse of its dominant market position. Whilst that investigation is ongoing, in a preliminary decision Ofcom refused a request by BT for interim relief to mandate access by Sky to its channels.8 This led BT to apply instead to the CAT to amend the original IRO to take account of the technological developments in its platform.

Reviewing BT's application, the CAT President, Mr Justice Peter Roth, noted that the IRO had expressly provided for the parties to apply for an amendment to its terms. The relevant issue in his mind was therefore not whether BT should be entitled to vary the order but rather whether a variation was appropriate in the circumstances.

The main argument put forward by Sky against the making of any variation was that, since BT had acquired valuable sports rights of its own, it was a more formidable competitor to Sky than it had been at the time the IRO was drawn up. It should therefore be able to stand on its own two feet and agree commercial terms with Sky rather than be given access via the back door of the must offer remedy.

Mr Roth J disagreed. Sky's arguments went to the legality of the must offer obligation itself. That issue was to be resolved in the main appeal, but in the meantime the CAT had to give full force to the key objectives the obligation was designed to meet, namely the preservation of competition amongst different broadcast platforms in retailing sports channels. This demanded the IRO should be amended to incorporate what had now become BT's primary platform.

 

Present clear, future uncertain

The immediate impact of the CAT's decision is positive for BT, filling in a considerable gap in its current sports offering to its customers. Less clear, however, is how long BT may be able to rely on Ofcom's original remedy and the revised terms of the must offer remedy.

As already mentioned, the CAT is due later this year to consider once more whether or not Ofcom's original decision was legally sound. Further, Ofcom has started the process of reviewing the WMO in order to determine whether it should remain in place. It recently published a consultation document setting out its initial view that, absent regulatory intervention, the risk remains that Sky could engage in practices which are prejudicial to competition in the pay-TV market, albeit it did not proffer any conclusive view either way.9 As Ofcom acknowledged in the consultation document, the market itself is in a constant state of flux, not least given that the Premier League is now auctioning its media rights for the next contract period (2016/17 onwards). Indeed that auction is itself in the regulatory spotlight since Ofcom also announced last November that it would be investigating a complaint made by Virgin Media as to way in which the EPL sells its right and the resulting impact on the price consumers have to pay to watch football on TV.10

Whilst BT has been relatively successful so far in using the legal process to achieve its commercial aims, there is some way to go yet before it can declare its strategy to be an unparalleled success. In the meantime, the more success it has in obtaining sports rights in competition with Sky and others, the less likely it will be in the future to argue the need for regulatory protection of its position.

 

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About the Author

Alex Haffner

Alex Haffner

Alex is a Partner in the Commercial, Sports and IP Team at Fladgate LLP, specialising in the sports, technology and media sectors.

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