Proposed acquisition by British Sky Broadcasting Group plc of control of British Interactive Broadcasting Holdings Limited

No. ME/1512/01

Undertakings in lieu of reference - Director General's advice, dated 25 April 2001, to the Secretary of State for Trade and Industry under section 75G(1)(c) 

In this submission I advise under section 75G(1)(c) of the Fair Trading Act 1973 (FTA) on the particular effects adverse to the public interest which, in my opinion, the creation of this merger situation might be expected to have.

I recommend that in lieu of a reference to the Competition Commission you accept undertakings from British Sky Broadcasting Group plc (BSkyB) in the form annexed to this submission. These undertakings are, in my view, appropriate to prevent the effects adverse to the public interest specified in this advice. If you agree with my recommendation the undertakings will need to be published together with the text of this advice.

Timing

Urgent. This is a proposed merger, with no statutory deadline. BSkyB's agreement with the other BiB shareholders will formally lapse if the undertakings are not finalised and accepted by 30 April 2001, but this date can be extended if necessary (See note).

Background

My predecessor advised you on 29 September 2000 that this merger raised significant competition concerns in the market for pay TV that would justify a reference to the Competition Commission. He recommended that the issues could be satisfactorily addressed by an undertaking in lieu of a reference. His advice was accepted by Dr Howells in the decision of 12 October 2000, which invited comments on the principles to be addressed.

Account was taken of representations made by BSkyB in the course of discussions concerning the proposed undertakings. In accordance with my advice, Dr Howells published draft undertakings on 20 March 2001 to enable interested third parties to comment on matters of detail.

My predecessor had noted that one consequence of the merger was that ten conditions imposed on the pre-existing BiB joint venture by the European Commission (EC) would cease to apply. These conditions had been designed to address competition concerns associated with the joint venture and predated the introduction of certain aspects of the current UK regulatory regime. My predecessor therefore reviewed the conditions in consultation with OFTEL and the ITC before concluding that only one condition, that requiring the provision of a clean feed of BSkyB channels to distributors, was necessary to address the particular adverse effects of this merger situation.

The text of the undertakings reflects that of the EC clean feed condition, but has been drafted in a form which is more appropriate to English law.

Analysis of the views of interested parties

Dr Howells invited interested parties to make representations on the proposal for undertakings in lieu of a reference requiring the provision of a clean feed of BSkyB's premium channels. Several responses were received but it is not possible to identify the respondents for reasons of commercial confidentiality.

All respondents agreed that undertakings in lieu of a reference would be helpful and all supported the principle of an undertaking covering the supply of clean feed versions of premium channels. There were certain differences of opinion regarding the scope of the obligation that should be required, and differing interpretations of the term 'clean feed'. I consider these points in turn.

Some respondents suggested that some of the other ten conditions imposed by the EC on the Bib joint venture should be reintroduced. My predecessor had already considered each of these conditions carefully, with the benefit of advice from OFTEL and the ITC on the extent of their regulatory powers. He concluded that only the clean feed condition needed to be reintroduced to address the adverse effects of this merger situation. I concur with this view.

It was common ground amongst all respondents that the provision of a clean feed should be such as to ensure that all distributors should be able, on request, to receive a version of BSkyB premium channels which lacks interactive icons. These are the on-screen representations produced by software codes embedded in the broadcast stream which give the viewer direct access to certain other BSkyB or Bib services by pressing buttons on their handset. The undertakings provide two options for distributors:

a feed from which all such interactive elements have been removed; or
a feed containing only such interactive elements as give the viewer direct access to those BSkyB or Bib services as are distributed by that distributor.
In the case of the second option the distributor would wish the interactive icons to work with its chosen set top box technology. It may be necessary for the distributor to work together with BSkyB in order to achieve this. The undertakings therefore provide that BSkyB will co-operate to facilitate this process and provide that the distributor will meet the reasonable costs incurred by BSkyB in doing such additional work as is required.

One party suggested that BSkyB should bear the costs associated with producing a clean feed version of the channel. I believe that current production technologies enable BSkyB to produce a version of its channels without its interactive icons at no extra cost relative to the interactive version. To the extent that work is required to produce a customised version, however, it is in my view appropriate that the reasonable costs of producing it should be borne by the distributor.

Another party suggested that the provision of clean feed programming should be on non-discriminatory terms according to a published price list. It is important to distinguish between the cost of the underlying programming, and the additional costs, if any, incurred by BSkyB in preparing a clean feed version. The cost of the underlying programming is not affected by the merger. As such it would not be possible to seek undertakings on BSkyBs pricing in this context.

The undertakings are designed to prevent anti-competitive effects which the merger situation might be expected to have. As such their scope should be limited to those channels in respect of which, either individually or collectively, BSkyB is likely to possess market power. I do not, therefore, accept the suggestion made by some third parties that the obligation should apply to all BSkyB channels. I consider it would be inappropriate to impose burdens on BSkyB in the case of minor channels where the merger might not be expected to have an anti-competitive effect. I note that my view is consistent with the earlier EC condition, which applied only to premium channels.

One party suggested that the undertakings should be valid for a period of at least four years. I accept that these markets are likely to change in the next few years, but do not consider it appropriate or necessary to impose a fixed time limit on these undertakings. Section 75J of the FTA requires me to keep the undertakings under review. It also requires me to give you advice if I consider that a party should be released from the undertakings or that they should be varied or superceded. This offers more flexibility and is for that reason in my view more appropriate than a fixed term.

Some respondents were concerned about BSkyB's cross-promotional activities. They were concerned about voice-overs and on-screen messages which made viewers and listeners aware of other services offered by the broadcaster. This type of cross-promotion is a feature of all television channels, including the free-to-air terrestrial channels, and it is already subject (except for the BBC) to Guidelines produced by the ITC. I do not consider this type of promotional activity to fall within the definition of an interactive service as it does not produce on-screen icons with which the viewer can interact.

I have considered whether the merger raises a new competition issue concerning such cross-promotion. I note that cross-promotion has occurred regularly before the merger. Indeed, it was the subject of a complaint to the ITC before the merger was notified to the OFT. I therefore consider that the issue does not arise from the merger situation.

Admittedly, it is possible that BSkyB might have a slightly stronger incentive to engage in such promotional activities as a result of the merger. However, I consider that such an effect is likely to be marginal, as BSkyB already had control of Bib before this proposed transaction. Moreover, I am aware that the ITC is in any event engaged in a review of cross-promotion.

Finally, one respondent questioned the need "to exempt BSkyB's own advertising from the undertakings". I think this is based on a misunderstanding of the text, as advertisements placed by BSkyB which contain interactive elements will be subject to the clean feed undertakings. BSkyB has confirmed that it agrees with this point.

Conclusion

Having considered the representations received, I recommend that in lieu of a reference to the Competition Commission you accept the undertakings offered by British Sky Broadcasting Group plc as appropriate to prevent the effects adverse to the public interest which this merger situation might be expected to have. I also recommend that you publish the text of the undertakings and this advice in accordance with the requirements of section 75H of the FTA.

NOTES

The parties told OFT on 26 April that the deadline in the shareholders' agreement had been extended to 31 May 2001.

Download the full text of the undertakings here (pdf format)

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