No fire without smoke? Virgin vs BSkyB

Given the date and my relative ignorance of the details of Virgin's claim (news reports 1,2,3,4, and press releases - virgin, bskyb; see also earlier posts on mediapal) it may seem foolhardy to prognose on the likely success or otherwise of Virgin's action against BSkyB, but below are some thoughts. The starting point is to recognise that Virgin are complaining about two separate matters: the refusal to supply channels (at least at an acceptable fee), and underpayment for Virgin's channels for carriage on Sky's platform.

The action is based on Article 82EC (EC competition law) and Chapter II (section 18) of the Competition Act 1998 (UK competition law). These two measures are equivalent to one another. They require not just that the impugned firm is 'dominant', but also that the firm has somehow 'abused' its dominant position. Therefore, being dominant is not unlawful in itself.

A position of dominance is reached when a firm's market power 'enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers, and ultimately of consumers'. So the steps to be undertaken in any given case are (1) market definition and (2) an assessment of market power. The latter involves (a) an assessment of existing competition on the market, (b) a review of wider market characteristics and (c) an assessment of potential competition / barriers to market entry.

In terms of market definition, both companies are vertically integrated across markets for channels/programmes (and to some extent programme production) and markets for delivering channels to consumers. Importantly, it is not clear how the downstream market should and will be defined. Virgin contends that it should be the market for pay-tv. However, it could conceivably be defined to include Freeview (either standalone or as part of BT Vision) and other emerging platforms. There are around 8.5 m consumers of free-to-air digital tv in the UK (DTT and free-to-view satellite).

If the market is defined as that for pay-tv platforms then market shares may indicate that BSkyB is dominant, as it has a relatively high share of pay-tv subscriptions (putatively close to 70%). This is based on the fact that BSkyB has around 8m subscribers compared with Virgin's 3.3m. If the free-to-air platforms are part of the same market - which, from the consumer's perspective, they may or may not be - then the contention that Sky is dominant on the downstream market dissolves.

There are other factors in play that may also affect the determination notwithstanding the high market share. These include on one hand the fact that the market for digital platform delivery is steadily growing in advance of digital switchover, but on the other hand the uncertainty as to the impact of on-demand services over the internet (note that CBS announced yesterday that it is following other content providers in offering its content free over the web, and that the introduction of BT Vision is in part predicated on a movement towards a new delivery model).

Sky is clearly not dominant on the upstream market (ie that for channels), except as regards the premium content (notably sports) segment of the market (which is not at issue in this case, and in respect of which the position has changed of late).

Let's assume for the meantime that Sky is dominant on the market for pay-tv. Virgin's real problem will be in proving that Sky's behaviour has been abusive. It wants Sky to be obliged to provide its channels; that is, it wants Sky's basic right to use its property as it thinks fit and its freedom to contract to be abridged. Competition law will sometimes do this, but only in extreme scenarios. (As an aside, Virgin's case is an unusual one. What is argues is that Sky has acted on the upstream market - where it isn't dominant - in such a way as to bolster its position of dominance on the downstream market - where it allegedly is dominant. This is curious, although not unheard of).

The conditions for such intervention by competition law are:
(i) that such provision of the good/product/service is 'indispensible' (no matter how much people want to watch Lost this is a tall order. Virgin may point to subscribers lost, but Sky could equally highlight those that have remained with the cable provider),
(ii) there is 'no objective justification' for the refusal (here, the justification is obvious - Virgin wouldn't pay. This will boil down to a question of degree (see below), but notably Sky seems willing to negotiate on the price, and on its own account the increase it asked for (20%) originally was hardly exorbitant - of course, Virgin has interpreted the price tag inflation differently, at close to 100%),
(iii) that failure to supply would result in the total elimination of all competition on the market (it clearly doesn't here), and
(iv) (possibly - the law is a little unclear) that the refusal prevents the emergence of a 'new product' (again, if this is a requirement, it doesn't seem to be satisfied here).

If Virgin is hoping to argue excessive overpricing (re the Sky channels) or underpricing (re its own channels), it will also have a difficult job proving an abuse. Competition authorities and courts have been very reticent to intervene in commercial deals because it is almost impossible to say what the benchmark of excess should be. Notably, Flextech (VirginMedia) seemed content to sign the contract when it signed it. It would now have to be able to show that it was somehow obliged by the structure of the market to enter the contract, and knew at the time that its additional revenues (advertising gains + carriage fees) would be outweighed by its costs. If these factors were the case then, why is it only crying now?

Others have suggested that Virgin is taking a significant risk; its hard to disagree. For my money, Virgin can only be using the action as a gambit in the negotiating game, and hoping that the fear of the competition authorities will see Sky capitulate. Moreover, the existence of a pending suit may influence the Ofcom investigation into the pay-tv market - a sort of 'no fire (the action) without smoke (underlying problems with market structure)' effect. Perhaps they'll prove us all wrong.