SKY'S OPINION ON FREESAT TV FROM THE BBC AND ITV.

SKY'S COMPREHENSIVE ANSWER TO THE BBC AND ITV JOINT VENTURE FROM THE BBC TRUSTS 12 QUESTIONS.

BSkyB
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1. Introduction
1.1. Sky is grateful for the opportunity to respond to the BBC Trust consultation on the BBC Executive’s proposals to launch a national satellite-based free-to-view digital service (Provisional Conclusions of the BBC Trust on BBC participation in a “Freesat” Proposition, February 2007 – henceforward ‘the consultation document’). We note that the BBC Trust has provisionally reached the conclusion that the BBC be allowed to proceed with this service and is consulting on that basis. The platform is to be developed and managed by a joint venture entity but for convenience it is referred to as ‘BBC Freesat’ in this response.
2. The need for a Public Value Test
2.1. We note that the Trust considers that the BBC Freesat proposition is a “non-service activity”, as defined by Clause 22 of the Framework Agreement, which does not require a service licence, as it is a means of distribution which does not have “the nature of a service” which “generally involve the selection or commissioning of content as well as its scheduling or distribution” (consultation document page 5). Accordingly, in the Trust’s view, the normal process of consultation which would apply to a new BBC service, the Public Value Test (PVT) comprising a Public Value Assessment and a Market Impact Assessment carried out by Ofcom, does not apply.
2.2. Subsequent proposals to introduce new services on the BBC Freesat service (e.g. high-definition broadcasting) would thereafter be subject to separate PVTs (consultation document page 5).
2.3. We are concerned that the Trust may not have taken all elements of the Framework Agreement into consideration when arriving at its decision not enter into a PVT for the Freesat proposition.
2.4. Clause 18 of the Framework Agreement states that, in relation to the Trust’s responsibility to determine which activities of the BBC should be covered by a service licence “the Trust should have regard to three considerations and the need to demonstrate how they have been taken into account. None of the three considerations is conclusive on its own. Sometimes different considerations may pull in different directions and the Trust must weigh them up and reach an overall conclusion on where the public interest lies.” (Clause 18(2) of the BBC Agreement). Those considerations are:
2.4.1. “a presumption that activities which involve the selection or commissioning of content and its scheduling or distribution are likely to be appropriate to be covered by a service licence”;
2.4.2. “the importance of delivering the greatest benefit and clarity for licence fee payers and making the decisions which would make most sense to them. In particular, activities which are recognised as a service by licence fee payers are likely to be appropriate to be covered by a service licence, and the boundaries between different service licences are likely to reflect the boundaries between services in the perception of licence fee payers”; and
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2.4.3. “the potential benefits of such a decision in providing certainty as to the scope of that service for, and opportunities for consultation with, other operators in the market place”. (Clauses 18(3) to 18(5) of the BBC Agreement)
2.5. On our reading, the Trust appears to have taken account only of the first of these considerations in deciding that the BBC Freesat proposition is a “non-service” that does not require a PVT. The decision if the other considerations had been taken into account might have been different, and we invite the Trust to re-examine this matter.
2.6. Our view is strengthened by the Trust’s decision to conduct a PVT in relation to the BBC’s so-called ‘on-demand services’, which, inter alia, included proposals to simulcast the BBC’s existing linear services, and make content available on an on-demand basis on a variety of new and existing platforms. In common with the BBC Freesat proposition, none of those “services” will require its own service licence, and may be described as being “limited to one element of distribution”. The parallels with BBC Freesat seem strong.
3. Rationale for the proposition
Competition
3.1. Sky believes that the arguments put forward in the consultation document that the new BBC Freesat proposition is a welcome addition to competition (see e.g. consultation document pages 10, 12, 18) are difficult to sustain in the context of ‘competition’ being state-funded.
3.2. Sky welcomes competition generally, including from other commercial satellite providers, and believes increased choice for consumers is a good thing. We are confident that our own Freesat service will be a very strong competitor to any rival offering. Our concerns are to do with the principle, which the Trust seems to accept without reservation, that it is an appropriate role for state-owned entities to be used as instruments of industrial or competition policy. There is a considerable body of economics and practical experience that indicates that such an approach is more likely to produce undesirable outcomes than good ones. It is a policy that has no place in a liberalised market economy such as the UK’s.
3.3. The Trust states that it has received privileged legal advice ‘on the Freesat proposition’s compliance with competition law (including state aid law)’ (consultation document page 14). Given its commitment to openness and transparency (consultation document page 3) the Trust should publish this advice and we will look at it and respond if necessary.
A ‘subscription-free’ service
3.4. Sky is particularly concerned by the failure of the Trust accurately to describe the nature of Freesat from Sky contained in the consultation documents. On at least six occasions the reader is left with the clear impression either in terms or by implication that Freesat from Sky remains available to customers only by the grace and favour of Sky and that at some point the service might cease to be free (see e.g. consultation document pages 10, 12, 18).
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3.5. This is, in particular, evident in one of the two “stated objectives of the proposition” which is:
“Offering a free-to-view digital upgrade path to ensure that licence fee payers can be offered all the benefits of digital… guaranteed free of subscription in perpetuity.” (consultation document page 7, emphasis added)
3.6. Further references to this proposition include:
“There would also be no guarantee that there would remain a subscription free route to access BBC services in such circumstances.” (consultation document p10)
“Furthermore, the Freesat service is guaranteed to remain subscription free.” (consultation document page 12)
3.7. Reception of the BBC’s services (and the services of any other broadcaster that broadcasts channels on a free to air or free to view basis), including HD services, is “guaranteed free of subscription in perpetuity” via Sky’s platform. Sky has absolutely no control over whether a broadcaster using its digital satellite platform decides to make its channel available on a subscription or a free to air/ free to view basis.
3.8. It is important to recognise that this is not simply a function of regulation (and, therefore, dependent on the persistence of the current regulatory regime, though there is no reason to believe that that regime would change in the foreseeable future). It derives from the fact that satellite transmission capacity is provided independently of Sky (by Astra and Eutelsat), and that any DVB-compliant services broadcast via that satellite capacity can be viewed via Sky’s set top boxes1.
3.9. On a number of occasions in the consultation document this implicit proposition appears to lead to erroneous statements. In particular, we would draw the Trust’s attention to the following:
“For those households not receiving digital services, 6 of the BBC’s 8 TV channels, 3 of its 11 network radio services and the BBCi service are not accessible (unless they subscribe to Freesat from Sky).” (consultation document page 9, emphasis added)
Freesat from Sky is not a subscription service.
“We have good grounds for the view that many such people would take up a non-subscription offer if it was available.” (consultation document page 18)
A non-subscription (satellite) offer is available.
3.10. In other words, in so far as the BBC services are concerned, there will be no practical difference between customers of Freesat from Sky and those purchasing the BBC Freesat proposition. Any channel which is available through BBC Freesat will also be available through Freesat from Sky. No viewing card will be required in either case and both will be ‘guaranteed free of subscription in perpetuity’ (consultation document page 7) – inasmuch as the phrase ‘in perpetuity’ has any meaning in real life.
1 For completeness, we have set out the position in relation to viewing cards in Annex 1.
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3.11. In Sky’s view the fact that one of the two key objectives of the proposition is based on a false premise seriously calls into question its rationale. We would be grateful if the Trust could acknowledge this error for the record in its response and give thought to whether it should reconsider its conclusions as a result.
Provision by a non-commercial entity
3.12. There is also an implicit proposition running throughout the consultation document that a justification for the BBC setting up its own digital satellite platform is that Sky’s Freesat service is provided by a commercial entity. For example:
“we have concluded that it is not acceptable for a significant proportion of licence fee payers to be exposed to the risk of being deprived of a subscription-free non-commercial access route to BBC services until as late as 2012” (emphasis added; and note that this applies only to BBC digital services as BBC1 and 2 are available via analogue)
and
“As part of considering the public value of the proposition, our view is that it would not be in the public interest for licence fee payers to be reliant only on commercial provider routes as a means of access to BBC subscription-free services.” (emphasis added)
3.13. This is mystifying and appears to be based on a misconception. Followed to its logical conclusion, it would involve the BBC having to own every part of the production chain involved in making and distributing its services – from programme making to the manufacture of set top boxes. Clearly, the BBC relies on “commercial providers” for a wide variety of services – including, in relation to digital terrestrial television, the “means of access to BBC subscription-free services”.
4. Issues of process
4.1. Sky finds the following aspects of the process which the Trust has decided on unsatisfactory:
4.1.1. in addition to our argument in section 2 above as to why the Trust should conduct a full PVT in respect of the proposals, Sky urges the Trust not to rely in any case on the narrow distinction between new services and new distribution methods in deciding not to proceed with a full public consultation. It is the Trust’s role ”to represent the interests of licence fee payers, assess their views carefully and appropriately, and…have regard to the competitive impact of the BBC’s activities on the wider market” (consultation document page 3). That implies a high degree of independent regulation of the BBC Executive which reassures commercial organisations that they are not at a disadvantage when faced with a state-funded competitor. The default option should thus be to consult as fully as possible;
4.1.2. the Trust states (consultation document page 6) that it took into account the problems caused to the BBC by delay. Minimising the delay in the interests of the BBC Executive is surely not a material factor for the Trust to take into account, and in any case, the proposal for a BBC Freesat
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service has been discussed for at least two years if not longer. If it were genuinely a matter of such urgency, surely more progress would have been made in the intervening period;
4.1.3. in a full PVT, neither the ‘research’ contained in the consultation document – which as the Trust says is anecdotal – nor the market implications paper published at the same time would have passed muster, and more robust information would have been necessary to allow BBC Freesat plans to proceed;
4.1.4. it is also notable that the proposal was initially examined by consultants (Fathom Partners and Indepen) appointed by DCMS who took a sceptical view of its viability. The response of the Trust was to commission a fresh study (by Frontier Economics) which took a different view. We believe that licence fee-payers’ interests would surely have been better served by starting with the presumption that a high burden of proof was required before authorising the development of the platform, rather than casting around for a consultant to give the ‘right answer’;
4.1.5. it is also difficult to understand the reasoning of the Trust in to refusing to consider at this stage the impact of an HD service or services being provided through BBC Freesat. Again, it is technically correct that at this time this is only a possibility. But it is abundantly clear from the Trust consultation papers that one of the principal drivers of the new BBC Freesat – indeed essential to its viability – is HD capability which will be built in to the set-top boxes from the outset. It is again Sky’s view that the Trust should have taken a broader view of its remit and taken this opportunity for a proper PVT in which the impact of HD services could have been considered;
4.1.6. finally, Sky considers that a 28-day consultation period is inadequate to allow a proper analysis and response to the BBC proposal, particularly as we note below that the information provided in the consultation documents makes a full response difficult.
5. Public value assessment
5.1. The Trust states that it has:
“considered the proposition against the following key measures of public value: reach; quality and distinctiveness; impact; and value for money.”
5.2. The assessment of the Proposition against these criteria is, however, cursory. More importantly, the Trust’s analysis of the proposition in relation to each of these criteria does not bear scrutiny. We assess the Trust’s conclusions on these matters on the basis of the information available to us in the sections below. We have also considered aspects of the proposed BBC Freesat as they relate to technical issues and market impact.
Reach
5.3. The Trust states that:
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“we consider reach to mean the extent to which the proposals will facilitate or increase [subscription-free access to the BBC’s Services]”
5.4. The reach of the BBC Freesat service would have an identical footprint (in relation to the UK) to Sky’s satellite platform (including in relation to Freesat from Sky). as we note in section 3 above, subscription-free access to BBC services is already available via Freesat from Sky.
Impact
5.5. It is difficult to ascertain what the Trust means by “impact” (unlike “reach”, the Trust does not provide a definition). In the first instance the Trust states:
“Based on our consideration of how the proposition would be in the best interests of licence fee payers and create public value, our view is that the proposition would be valued by licence fee payers.”
This is surely a circular argument.
5.6. The Trust goes on to state:
“We consider the impact of an additional means of access to 6 of the BBC’s 8 TV channels, 3 of its 11 network radio services and the BBCi service which [sic], along with a substantial range of other digital services from other broadcasters carry [sic] will have a significant positive impact on them – particularly for those who are unable to receive the Freeview service and within that number those who do not wish to use Sky Freesat or who do not want, or cannot afford to use, subscription based services now or in future.” (emphasis in the original)
This is subjective.
Quality and distinctiveness
5.7. Again, the Trust provides no definition of what it means by either “high quality” or “distinctiveness”.
5.8. In relation to quality, the key measures that the Trust appears to have applied are:
5.8.1. that consumers using the platform will “face no adverse [sic] pressure from having a choice either to use a free commercial provider or upgrade their service”; and
5.8.2. that it is guaranteed to remain subscription free.
5.9. Neither of these are criteria that would commonly be recognised as key indicators of the “quality” of platform services (and both criteria are based on a misconception about Sky’s Freesat proposition). Such criteria would normally include assessment of things such as:
• ease of installation;
• customer support;
• reliability of service; and
• functionality of the service.
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5.10. We find it disappointing that the Trust has not sought to assess the “quality” of the service in relation to any of these elements.
5.11. In relation to the “distinctiveness” of the service, the Trust appears to have made no assessment at all. While it is difficult for us to make a judgement on this matter on the basis of the detail about the service that has been provided, it would appear that it is intended to be almost identical to Sky’s Freesat service, in which case an argument that it is “distinctive” would be very hard to sustain, unless simply being supplied by the BBC makes something distinctive.
5.12. To the extent that it is different because the set top boxes intended to be sold in relation to this platform would be unable to receive subscription services (as Sky’s set top boxes are) it would seem that this “distinctiveness” in fact amounts to offering consumers a service that restricts the choices available to them. That is not presumably a public value criterion.
Value for money
5.13. It is virtually impossible for Sky to comment adequately on this aspect of the Trust’s assessment, as the details that have been provided on cost, or the benefits said to stem from the proposition, are scant.
5.14. In particular, any understanding of the likely customer take-up of a BBC Freesat platform offering depends on the retail price of the box and installation. These figures have been omitted in the market implications document (page 4, paragraph 10). No sensible response can be attempted without them.
5.15. We note, however, that:
5.15.1. it appears from the Trust description of the proposition that any set top box marketed under the proposition would be “future-proofed (for example by designing in high definition (HD) and personal video recorder compatibility)” (page 4 of the consultation). It is not clear from the proposition whether all boxes will be HD enabled or not, but for the proposition to support other broadcasters’ HD services as proposed, it must be assumed that this would be the case;
5.15.2. the Fathom Partners and Indepen report notes that the BBC’s cost model “assumes a price-difference of just £25” between the price of an SD box and an HD box.
In which case, it appears to us that the BBC has either over-estimated the cost of an SD box or substantially under-estimated the cost of an HD enabled box (as the report notes, “the price-difference could be much greater”). Without a detailed breakdown of the BBC’s model, it is not possible to establish where the fault lies. In either case, there will be a significant impact on take up of the proposition that must be factored in to any approval.
Technical impact
5.16. In relation to its assessment of the costs of the proposals, we note also that the consultation document has also omitted an important element. The Trust needs to be aware that the BBC Freesat proposition described in its consultation may have significant implications for the technical operation of Sky’s own platform. These
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implications arise from the fact that, although not expressly stated in the consultation, it is our understanding that the BBC is proposing that a single broadcast stream of its services will be used to provide services to both Sky’s set top boxes, of which there are in excess of ten million, and the new BBC Freesat set top boxes, and that such broadcast stream will carry additional data components intended for the BBC’s Freesat platform.
5.17. Proceeding in this way poses technical risks to both platforms. As the two different box populations employ different technology for services such as the EPG, channel numbering and interactive services, there would need to be significant and continuing technical co-ordination between Sky and the joint venture operator of the BBC Freesat platform to ensure that the signals intended for one platform do not have any negative impact on the other. Such negative impacts could, for example, result in third party channels not playing out correctly on both platforms, or, in the worst case, result in set top box failures across one or both platforms.
5.18. The BBC has already requested that Sky undertake certain testing in connection with the signal types it intends to broadcast for the new platform. Sky has indicated to the BBC that it is prepared to do so in parallel with this consultation as a gesture of goodwill, but that this will require a full evaluation of the technical implications of the launch of the new platform. In addition, Sky would expect that the testing it carries out to enable the launch of the platform will be documented in a contract, presumably with the joint venture entity undertaking the technical co-ordination of the new platform. These are matters that should be agreed as a matter of urgency.
6. Platform neutrality
6.1. Sky has been concerned by the BBC’s unwillingness to promote digital services on a platform-neutral basis despite the good example set by Ofcom’s Cross-promotion Code. The BBC has taken advantage of the fact that it does not have to comply with that code to indulge in cross-promotions which favour digital terrestrial services over competing platforms, in particular by using the brand name ‘Freeview’ whilst referring to other platforms using the generic platform technologies, such as “satellite” and “cable”. This is clearly discriminatory and runs contrary to the BBC’s agreed purpose of promoting digital switchover. Sky is disappointed that the Trust appears to have endorsed this discrimination in the draft Code on cross and digital TV promotion published last month.
6.2. The Trust should require that, if permitted, any BBC Freesat service should only be promoted in a strictly platform-neutral manner. This means that on-air and other promotional activity, and customer advice via call centres etc should make it clear that there is more than one Freesat offering, and should set out the different features and benefits of each. At present the BBC refers to ‘free satellite’ meaning Freesat from Sky. If the BBC wishes to refer to its proposed new platform by any eventual brand name, then equal treatment should be afforded to Freesat from Sky. In addition, any promotion of the new BBC Freesat should be separated from the BBC’s general promotional activity, and from that for the Freeview service.
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7. Conclusion
7.1 In view of our concerns about the rationale behind this service; our observations on the process through which it has been considered by the Trust; the apparent inaccuracies about our services; and the omission of a discussion of the extent to which BBC Freesat relies on our technical co-operation, we suggest that the best way forward is for Sky and the Trust to meet at an early stage to discuss this proposal.
Annex 1
It is not necessary to have a viewing card to view via Sky’s set top boxes channels that are broadcast “in the clear” (i.e. unencrypted). Currently all but five free to air channels broadcast via digital satellite are broadcast in the clear – including the BBC’s and ITV’s channels.
Currently, a viewing card is required to view Channel 4 and five (as well as five Life and five US) via Sky’s set top boxes because these channels are encrypted (at the broadcasters’ behest) in order to prevent “overspill” into territories outside the UK where these broadcasters do not hold rights for some of the programming carried on their channels. Should these broadcasters continue to encrypt their channels for broadcast via satellite they would not be able to be received by the BBC Freesat service (as the BBC set top boxes would not be able to decrypt those channels). This would suggest that, if they have any intention of being part of the BBC Freesat service, these broadcasters intend to cease encrypting their channels on digital satellite – in which case no viewing card would be required to receive those channels via Sky’s set top boxes.
For completeness, we would note that, in any event, the need to have a viewing card to view an encrypted free to air channel in no way constitutes a barrier to receiving those channels. All Freesat from Sky customers, Sky subscribers, Sky churners, and subscribers to other services offered on the digital satellite platform have valid viewing cards.