DCMS COMMUNICATIONS REVIEW: RESPONSE TO DCMS QUESTIONS ON COMPETITION IN CONTENT MARKETS

DCMS COMMUNICATIONS REVIEW: RESPONSE TO DCMS QUESTIONS ON COMPETITION IN CONTENT MARKETS An outline of some of the relevant market developments, in terms of both technological change and developing business models (e.g. convergence in distribution of content and services as well as in the provision of retail bundles). Introduction The UK media landscape is changing rapidly. Consumers now have access to a greater range of communications and media services than ever before and convergence is changing the way in which we use communications services and consume content. For example, content that was previously only delivered on television, in a cinema, or in a newspaper can now be accessed on devices such as smartphones, tablets and internet-enabled TVs. While consumers are benefitting from this evolution, there are market developments which may raise new content-related competition issues. The ability of developing platforms to feed back information about consumers and their consumption habits appears to be changing the media landscape, providing much more detailed viewing information than has previously been possible with one-way broadcast platforms. Content remains important to consumers Spending on content production continues to grow, up 7% year-on-year from 2010, to a total of 5.4bn. 1 Total spend on content across all UK broadcasters 1 Ofcom 2011 CMR, figure 2.29 http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/uk_cmr_2011_final.pdf. 1

Despite the growing number of channels available to consumers, the main public service broadcasting (PSB) channels (BBC 1 and 2, ITV, Channel 4 and Channel 5) still have the majority of audience share 55.2% of viewing in 2011. Though this majority is falling in 2001, channels other than the core PSB channels comprised just 19.6% of viewing if the figures for the whole portfolio of channels offered by the PSBs are considered, their share of all viewing is 74% across the day, and 79% at peak times. 2 Focussing specifically on pay TV, and notwithstanding differences in platforms and delivery, content remains of critical importance to consumers. Ofcom s investigation into the pay TV market highlighted two key types of content that drive purchasing decisions, because they are both valued by consumers, and not available via free-to-air services sports rights and premium film content. The research underpinning this review highlighted the importance to consumers of this content: 87% of consumers cited content as being a must-have element of the TV choices 3 ; 25% of pay TV consumers cited sport as must-have content. 4 There are other forms of content which are important to consumers, but their widespread availability on free-to-air TV means that they cannot be used as a differentiator, and consumers are therefore likely to be less willing to pay for services based on this content. The Ofcom Pay TV market review concluded that the Pay TV market in the UK is not effectively competitive due to the restricted distribution by Sky of its premium sports and movies channels. Remedies imposed on Sky as a result of Ofcom s findings are the subject of appeal. In separate proceedings, the Competition Commission has also recently provisionally found that competition in pay TV at the retail level is ineffective (see below). Regarding sports rights, 59% of all consumers who regularly watch sport on TV cited football matches as must-have content, with a particular focus on FA Premier League matches. Earlier this month, together Sky and BT were reported to have paid more than 3.0bn over three years for live broadcast rights to 154 matches per season from 2013-14 a 70% rise on the current deal. Since 1988, the cost of Premier League rights has risen from 15m per season to over 1bn. 5 2 Ofcom 2012 PSB Annual Report: http://stakeholders.ofcom.org.uk/broadcasting/reviewsinvestigations/public-service-broadcasting/annrep/psb12/. 3 Figure 12, Ofcom s first Pay TV consultation..http://stakeholders.ofcom.org.uk/binaries/consultations/market_invest_paytv/summary/pay_tv.pdf. 4 Figure 13, Ofcom s Pay TV consultation. 5 Data to 09/10 season drawn from Annex 10 to Ofcom s first Pay TV consultation; later data from news sources. 2

In Ofcom s review of pay TV, premium film rights were defined as the rights from the main six Hollywood studios, in the period 12 months from their theatrical release. The research underlying this review revealed that premium film content was of significant value to consumers. More recently, the Competition Commission (CC) has been progressing its market investigation into movies on pay TV. Last year, it provisionally found an adverse effect on competition (AEC) in the pay TV retail market as a consequence of Sky controlling almost all first subscription pay TV window movie content. However, in May this year, it published revised provisional findings, in which it proposes to conclude that there is no adverse effect in the market in relation to movies, although it remains of the view that competition in the pay TV retail market as whole is ineffective. 6 One of the reasons for the CC deciding to reverse its provisional findings is that, in its view, the launch of new subscription video on-demand (SVoD) services, delivered over the open internet, from LOVEFiLM in December 2011 and from Netflix in January this year have already had an impact on Sky Movies. The CC also considers that it overstated the importance consumers attach to seeing recent movies. It considers that another movie service can be a reasonable substitute for Sky Movies on the basis of all attributes (e.g. range of titles and price) taken as a whole. It is also clear from the CC s revised provisional findings that due to the additional interest in obtaining movie rights for subscription pay TV services from LOVEFiLM and Netflix, there is now considerably more content licensed in a second subscription pay TV window. This window provides alternative providers such as Netfix with access to movie rights, on an exclusive basis, at a point in time about 15 months after those same movie rights have already been exploited on an exclusive basis by Sky. This is an interesting development, but it is possible that it will merely result in segmentation of the market, rather than effective 6 We understand that its final report is due to be published shortly. 3

competition, depending on the extent to which subscribers to premium movie services regard older films as a close substitute for recent films. As consumers tastes change over time, we may see changes to the types of content that drive their purchasing decisions; new genres of content may emerge as highly valued. For example, UK costume drama Downton Abbey attracted between 8.5 and 10m viewers per episode in its first season 7 ; in 2010, Sky entered into an exclusive deal with HBO worth in the region of 150m over five years, including rights to HBO s back catalogue as well as new programming 8. In February 2011, Sky launched a new channel, Sky Atlantic, to be the home of HBO in the UK and exclusive new UK programming; by May this year, the new channel had a share of 0.3% of total TV viewing 9. Content delivery is diversifying and increasingly includes online Traditionally, broadcast services have been delivered via one-way platforms i.e. via satellite, a cable connection, digital terrestrial TV (DTT) or analogue TV. Increasingly, as technology develops, those services are migrating towards delivery platforms which are hybrids of traditional broadcast and the internet via internet protocol TV (IPTV), using a closed or proprietary internet connection, or the open internet. Ofcom s 2011 Communications Report noted that 35 per cent of individuals in Q1 2011 claimed to watch catch-up TV distributed over the internet. 10 Examples of hybrid platforms include BT Vision, Virgin Media s TiVo service and Sky s Anytime+ pull video-on-demand (VoD) service. BT Vision is a hybrid DTT/IPTV service, with broadcast services being received via DTT through a TV aerial while VoD and interactive services are delivered via the user s internet connection. Virgin Media offers a next generation set-top box, powered by TiVo, which, among other things, offers on-demand content and enables consumers to record, pause or rewind content and use web apps such as Facebook and Twitter. Sky Anytime+ offers movies and TV programmes on-demand and is available to all Sky subscribers with a Sky+ HD box and a broadband connection. Some hybrid platforms provide access to on-demand content using managed services that is, where the delivery of the content is managed end-to-end enabling greater quality of service, as opposed to over the open internet. Such content services will typically be offered by service providers retailing internet services and audio-visual content services in a bundled package. In addition, audio-visual services can be delivered over the open internet this delivery method is described as an over-the-top (OTT) service (though it should be noted that not all audio-visual services provided via OTT offer users access to the open internet via set-top boxes, for example to browse the web). 7 BARB Weekly Top 30 Programmes http://www.barb.co.uk/. 8 Taken from http://www.guardian.co.uk/media/2010/jul/29/bskyb-buys-hbo-tv-catalogue. 9 BARB Establishment Survey of TV Homes, annual, to March 2012. 10 Ofcom 2011 CMR, page 103, paragraph 2.1.4. 4

There are a growing number of retail service providers distributing their content to consumers principally using the open internet. Some of these services are free-to-view (Google TV, films on YouTube), some use a subscription model (LOVEFiLM, Netflix) and some operate on a pay-per-view basis (Blinkbox, Dixon s KnowHow Movies, HMV, itunes). In January 2012, Sky announced its intention to launch a new stand-alone subscription service branded Now TV, which it is planning to make available from summer 2012. Takeup is also growing, with 41% of households stating that they consume audio-visual content, including PSB catch-up services such as BBC iplayer, in some form via the internet. 11 On-demand services and their UK launch dates Service (involved parties) itunes (owned byapple) LOVEFiLM (part of the Amazon group) Blinkbox (80% owned bytesco) Films on YouTube (part of the Google group) UK launch date 2001 2002 2008 August 2010 HMV on demand October 2010 Netflix January 2012 KnowHow Movies (part of the Dixons group) YouView (JV between the BBC, ITV, Channel 4, Channel 5, BT, TalkTalk group andarqiva) Now TV (owned bysky) March 2012 Summer 2012 (proposed) Summer 2012 (proposed) Early in the life of many of these services, they would have been accessed by computer and viewed on a computer screen; relatively recent technology developments mean that increasingly, these services are being streamed to a TV set (for example, via Apple TV) or received and shown on TV sets connected to the internet ( smart TVs ). These developments are blurring the lines between video on demand and linear, licensed television services. The UK s telecommunications infrastructure is already increasingly supporting these services, with 76% of all UK households having a broadband internet connection and over half of them having access to super-fast broadband services. 12 Though the infrastructure is 11 Ofcom 2011 CMR, page 93, paragraph 1.7.9. 12 Ofcom 2011 CMR, page 9. 5

growing, the take-up of such super-fast services has been modest to date as of June 2011, just 4.3% of households in the UK had taken up super-fast broadband services. 13 It is too early to tell how OTT services will develop and how consumers will respond, not least with Google TV, YouView as well as Sky s Now TV yet to launch in the UK. We note however, that Google TV's US launch has not been particularly succesful, and this is widely attributed to a lack of access to content, though other factors such as the form of the search interface may also be relevant. Consumers now upgrade their TV sets more frequently than they used to, 14 and OTT services typically do not require an initial contractual commitment. This may enable new services to achieve a faster rate of penetration than past services have achieved. Conversely, these features may mean that it is more difficult for an OTT service provider to maintain viewer/subscriber numbers. The emergence of new players using technology to innovate and bring new service propositions to the consumer clearly has the potential to deliver consumer benefits. However, network effects could increase the possibility of new bottlenecks emerging, potentially creating new sources of market power. Consumers are using a range of devices to access content Traditionally, consumers have accessed content over one platform, delivered to a television set or similar device. For example, with regard to pay TV content, this might be Sky s satellite platform or Virgin Media s cable platform, delivered to a television screen. However, technological change has been providing multiple routes for content into the home. 13 Figure 6.10, Ofcom s International CMR 2011 http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/icmr/6_-_telecoms.pdf. 14 http://stakeholders.ofcom.org.uk/binaries/broadcast/reviews-investigations/psbreview/psb2010/overview1.pdf 6

Since 2008, as the number of digital terrestrial-only homes remains constant, the take-up of digital cable, free-to-view satellite and pay digital satellite has increased. 15 Taking a hypothetical household in the UK in 2012, and how they might use this technology: they may have paid-for satellite services on their main TV 9.6m homes in the UK take satellite pay TV services on their primary TV set. 16 They may have a second TV set, receiving digital TV via a Freeview box 61% of second TV sets in UK households take DTT services, and one third of homes with at least one TV set take both DTT services, and either cable or satellite services. 17 This household may also have a broadband connection fast enough to deliver a range of OTT content services (the average speed of broadband connections in the UK is 6.8MB per second 18 ), and via which they can watch films or TV content on demand, as well as streaming music and videos from sites such as YouTube. At the device level, a range of television screens now incorporate an internet connection and an unprecedented degree of processing power to Q1 2012, 2.9m smart TVs with internet connectivity had been sold in the UK. 19 However, the number of consumers making use of this integrated connectivity on a regular basis is uncertain; many of these devices are likely to be used in conjunction with services that provide on-demand content in an integrated interface, (for example, households with Sky and Virgin Media pay TV services) which may be a preferable way to access the same content. There is also the interesting new potential for content to be delivered via 'apps' residing in a smart TV, in a manner that reduces the importance of traditonal platform operators. This is analogous to the way smartphones have impacted mobile operators. Beyond TV sets, consumers are using other devices to access content. By the end of 2010, 5% of UK households had access to a games console, about one-fifth of which used them to access audio-visual content. 20 The use of smartphones is on the increase: 26% of the UK now have a smartphone device; more than half (59%) of these users have started using their smartphone since 2010. 21 Of the users who access the internet on their mobiles, 25% use their mobile online to watch TV or video content, or to listen to music online. 22 In addition to smartphones, 2011 has seen the emergence and increase in popularity of tablet devices, such as the ipad. It is estimated that 12% of UK households have access to a tablet device. 23 This migration by consumers from TV sets to using a variety of different devices on which to view audio-visual content has a number of potential implications: many of the producers of such hardware have their own proprietary systems for managing rights (i.e. music or film via itunes, e-books via Kindle) which may create stickiness and reduce customer switching; 15 Ofcom 2011 CMR, figure 2.41. 16 Screen Digest TV Annual Market Summary, May 2012. http://www.screendigest.com/intelligence/tv/uk/tv_intel_uk_1/view.html?start_ser=ti. 17 BARB Establishment Survey of TV Homes, annual, to March 2012. 18 Ofcom 2011 CMR, page 15, Fast Facts. 19 GFK sales data. 20 Ofcom 2011 CMR, pages 108 and 101. 21 Ofcom 2011 CMR, page 194, paragraph 4.1.2. 22 Ofcom 2011 CMR, figure 4.6. 23 Carat 2012 Consumer Connection System results, as reported in The Drum http://www.thedrum.co.uk/opinion/2012/05/21/tablet-penetration-increases-almost-fivefold-year-homelaptops-still-dominate. 7

the line between content delivered via platforms traditionally licensed and regulated, and those which are not, is increasingly blurred. Alternatively, the take-up of devices other than TV sets to view audio-visual content has the potential to decrease the importance of, and control held by, any given individual platform. Discovering and choosing content Electronic programme guides (EPGs) provide users of television, radio, and other media applications with continuously updated menus displaying broadcast programming or scheduling information for current and upcoming programming. For the three most popular platforms (on satellite, cable and DTT), Sky, Virgin Media and DMOL 24 respectively are responsible for the allocation of EPG numbers. On each of these television programme guides, BBC1, BBC2, ITV1, Channel 4 and Channel 5 currently enjoy the top positions. This is a consequence of regulation but also consumer expectations. New technologies and innovations are changing the linear EPG world and creating more sophisticated user interfaces. In a move away from the traditional now-and-next model for finding and choosing content, consumers are able to scroll backwards through their EPG to access past programmes on the Virgin Media TiVo platform, and online on-demand services from traditional broadcasters (e.g. BBC iplayer, 4oD) allow users to find content from recent TV schedules. Smart TVs now use two-dimensional grids for on-demand content portals, in addition to the traditional list format for programme guides a style made popular by Apple s iphone and ipad devices. In addition, equipment manufacturers have developed apps that let consumers navigate content on their smart TVs and other audio-visual equipment using smartphones. For example, Samsung Smart View is an Android app that turns a smartphone into a Wi-Fi remote control. LG Smart TV grid format interface Platforms such as itunes and HMV allow users to browse content by genre, in a manner disconnected from linear broadcast styles and traditional EPGs; other retailer services such as Netflix and LOVEFiLM employ recommendation engines to suggest to consumers content 24 DMOL, DTT Multiplex Operators Limited, is a company owned by the operators of the six DTT multiplexes. 8

based on past viewing habits. Detailed specific profiles of individuals viewing habits can be assembled, with the ability to recommend other content to watch for example, TiVo s Suggestions with its Thumbs Up and Thumbs Down or Apple s Genius recommendations for movies and TV shows now available on Apple TV. In the future, navigation on content platforms may increasingly take the shape of search results, as illustrated by Google TV. Google TV search-style interface Concerns have been raised about EPG numbers being allocated in ways that are advantageous to a vertically integrated platform operator, to the detriment of third party channels. Such complaints are currently usually assessed under the fair, reasonable and non-discriminatory (FRND) elements of Ofcom s EPG Code, the basis of which is in section 316. Responding to concerns about FRND treatment in the context of more complex user interfaces, whether in a two-dimensional format or of another fundamentally different navigation approach, could be significantly more challenging. Greater integration across the value chain, and continued buying in bundles There are several ways in which broadcast platforms have typically been integrated: Vertical integration of content businesses (e.g. Sky is a TV channel broadcaster and a retailer of packages of channels) Horizontal integration of adjacent elements of the value chain, such as bundling network services with content (e.g. Sky, BT, Virgin Media) 9

We are now seeing communications players increasing their presence to multiple points of the value chain. For example, Apple is using its operating system to integrate content from itunes and the Apple store, making content accessible across Apple devices through the cloud, or via devices such as Apple TV, enabling users to combine and stream content from their own content libraries or direct from the internet; Amazon is using its Kindle e-readers and tablets to build a wider ecosystem integrating its content retail services. With regard to the retail of such services, consumers continue to buy TV and communications services in bundles for convenience and to take advantage of discounts. Although the growth of buying in bundles seems to be stabilising, such packages remain popular with consumers: 53% of homes took a bundle of communications services in Q1 2011, increasing by three percentage points from 2010. 25 25 Ofcom 2011 CMR, figure 1.5. 10

Most pay TV retailers offer communications as well as pay TV products and may offer a triple play product (i.e. TV, broadband and fixed line telephony, including line rental) at below the price of the constituent TV and communications products, either via a lower list price or by offering greater discounts to new subscribers. In Q1 2011, triple-play accounted for 16% of all consumers (the most popular package being fixed voice, broadband and multichannel TV). 26 While these trends towards diversification along the value chain and the provision of multiple retail services may create a better consumer experience, it could also lead to increased customer lock-in. Whether there is sufficient competition from a number of well-resourced players across the communications value chain converging from different directions is too early to say, as is whether these are likely to lead to enduring problems and potential harm to consumers. It is worth noting the separate competition regimes for electronic communications and broadcasting which may raise issues; for example in this context, for the telephony/broadband elements of triple play packages on the one hand, and the pay TV element on the other. Increasing audience information may start to change the advertising landscape Television remains attractive to advertisers for its ability to reach large numbers of people in a short space of time and TV advertising revenues have recently been rising. Alongside this is the growth of internet advertising, which overtook TV advertising in revenue terms for the first time in 2010, increasing 16% to 26bn in that year. 27 26 Ofcom 2011 CMR, figure 1.5. 27 Ofcom 2011 CMR, figure 4.9. 11

As well as providing audio-visual content, internet advertising can target users according to their interests and usage habits. In the future, TV viewers consuming content on platforms with a level of interaction beyond linear, one-way communication can expect to receive tailored adverts selected for them based on their viewing habits together with other demographic and postcode data. For example, users of Channel 4 s on-demand service, 4oD, can access more features if they decide to register an account on the site, which involves the provision of personal data. 28 This could potentially be used to deliver more targeted advertising to the viewer. Sky is understood to be intending to launch its tailored advertising product AdSmart, 29 already available on its online player, to its Sky+ HD boxes next year. Virgin Media is expected to launch a similar targeted advertising service later this year. The analysis of this viewing data and innovation in its application may well be a key area of differentiation and competition between platforms. Already there is debate about whether content providers should have access to viewing data. This may be an area which is resolved through many bilateral commercial negotiations; alternatively, it may be beneficial for a common standard of widely available information to be established, akin to BARB advertising data in linear broadcasting. The question of who owns and has access to the consumer data is an area in which there could be future competition concerns; as noted above, this data has an impact on many parts of the value chain, and ownership of it could become increasingly important. 28 For examples of how Channel 4 serves advertising to users of its 4oD service see: http://www.channel4.com/programmes/4od/. 29 http://www.skymedia.co.uk/advertising/tv/adsmart.aspx. 12

An overview of how Ofcom implements section 316 of the Communications Act, how this section of the Act fits into the wider broadcasting regime, what it has dealt with in the past and some of its inherent limitations. Sections 316 to 318 of the Communications Act 2003 ( CA03 ) create a sector specific competition regime for broadcasting. Section 316 provides for Ofcom to include conditions in services licensed under: the Broadcasting Act 1990 ( BA90 ) - e.g. content services broadcast over satellite and/or cable under Television Licensable Content Service licences; or the Broadcasting Act 1996 ( BA96 ) e.g. content services broadcast over digital terrestrial television ( DTT ) under Digital Television Programme Service licences, or DTT multiplex licences. Ofcom inserts conditions to ensure fair and effective competition in the provision of licensed services or connected services. A licensed service is a service licensed under BA90 or BA96. A connected service is defined under s316(4) as: in relation to licensed services, means the provision of programmes for inclusion in licensed services and any other services provided for purposes connected with, or with the provision of, licensed services. Under s316(2) Ofcom must, in particular, insert into licences such conditions as it considers are appropriate for securing that a provider of a licensed service does not enter into agreements or engage in practices which Ofcom considers would be prejudicial to fair and effective competition. Section 316(3) provides that a condition imposed under s316 may require a licensee to comply with a code or direction. The Cross-promotion Code and the EPG Code, discussed further below, are examples of codes containing provisions derived from s316. Section 317(2) provides that before acting under s316 to ensure fair and effective competition Ofcom must consider whether it would be more appropriate to proceed under the Competition Act 1998. Section 318 contains provisions requiring review of regulation imposed under s316. The fact that s316 is a part of the regime for services licensed under BA90 and BA96 means that: there is a risk that a provider might try to avoid regulation imposed in the UK under s316 by obtaining a broadcasting licence in another EU member state; it may not be possible to regulate standalone on-demand services under s316; and 13

where the company which is the source of a competition issue in broadcasting (e.g. at the retail level of the market) does not hold a licence, it may not be possible to tackle that issue under s316. Section 316 has been deployed by Ofcom in the following ways: Sky Sports wholesale must-offer On 31 March 2010 Ofcom issued a decision inserting conditions into the licences for Sky Sports 1, Sky Sports 2, Sky Sports HD 1 and Sky Sports HD 2. The conditions require Sky to offer to wholesale these channels to retailers on non-sky platforms. The conditions relating to the SD channels also set a regulated price for offers of the channels (or combinations of the channels). This decision is currently the subject of appeals to the Competition Appeal Tribunal. General licence conditions in broadcasting licences Ofcom s standard form licences for Television Licensable Content Services and Digital Television Programme Services contain the following general licence condition derived from the drafting of s316 CA03: (1) The Licensee shall: (a) (b) (c) not enter into or maintain any arrangement, or engage in any practice, which is prejudicial to fair and effective competition in the provision of licensed services or of connected services; and comply with any code or guidance for the time being approved by Ofcom for the purpose of ensuring fair and effective competition in the provision of licensed services or of connected services; and comply with any direction given by Ofcom to the Licensee for that purpose. (2) In this Condition [ ] connected services and licensed service have the meanings given to them in Section 316(4) of the Communications Act. The DTT multiplex licences contain an equivalent condition. Those licences also contain some more specific conditions relating to fair and effective competition, for example in relation to the allocation of multiplex capacity. The EPG Code 30 The EPG code applies to the provision of Electronic Programme Guides, as defined under s310 CA03. Pursuant to s310 the EPG Code regulates the prominence afforded to public service broadcasting channels on EPGs. 30 http://stakeholders.ofcom.org.uk/binaries/broadcast/other-codes/epgcode.pdf 14

The EPG Code also contains requirements based on s316. It is therefore a code for the purposes of s316(3)(a). Ofcom concluded that, in order to secure that the providers of EPGs licensed by Ofcom do not prejudice fair and effective competition, EPG providers should comply with the following provisions: to ensure that any agreement with broadcasters for the provision of an EPG service is made on fair, reasonable and non-discriminatory terms; to publish and comply with an objectively justifiable method of allocating listings. This does not preclude different methods for example, objectively justifiable methods could include first come, first served, alphabetical listings, and those based on audience shares; to refrain from giving undue prominence in any listing or display to a channel to which they are connected, except as required by the appropriate prominence provisions; to carry out periodic reviews of their listing policy and of channel listings made in accordance with that policy, in consultation with channel providers; to ensure that viewers are able to access all television and radio services included in the EPG service on the same basis, provided that the viewers are equipped to use the EPG service and to receive the relevant programme services; to ensure that free-to-air services are at least as accessible as pay TV services, and that reception does not require additional equipment or commercial agreements over and above those required for the acquisition of the receiving equipment; and to refrain from imposing any condition in an agreement for EPG services between an EPG operator and a channel provider specifying exclusivity to one EPG for any service or feature, including the ability to brand services and access to interactivity. The Cross-promotion Code 31 Television broadcasters are left with remaining airtime between advertising and programmes which they use for promotions. The ITC issued rules in 2002 regulating promotions. Those rules addressed both competition and content issues, such as the potential impact of excessive cross-promotion on competition between channels and digital retail TV services and also on the viewer in terms of clutter (excessive quantity of logos, on-screen graphics and other messages). Those rules were adopted by Ofcom in December 2003, and therefore elements of those rules were covered by s316(3)(a). Ofcom conducted a review of the Cross-Promotion Code in 2005/2006. On 9 May 2006 Ofcom issued a statement which narrowed the scope of the code to two rules (still currently in force): 31 http://stakeholders.ofcom.org.uk/binaries/broadcast/831190/crosspromo.pdf 15

A requirement on all television broadcasting licensees and S4C to limit the subject of cross-promotions to broadcasting-related services. This was considered necessary in order to protect consumers from promotions that provide no benefit to their viewing experience and to ensure the separation of television programmes from advertising. A requirement on Channels 3, 4 and 5 to maintain neutrality between digital retail TV services and digital platforms. Discrimination by the commercial terrestrial broadcasters in favour of one particular digital retail TV service or digital platform was considered to have the potential to have a material impact on competition between digital retail TV services. This was thought to be of particular importance as analogue-only homes made choices about digital TV services in the run up to digital switchover. It was therefore considered appropriate, in these particular circumstances, for Ofcom to put in place this precautionary measure. As a result of the second rule, the Cross-promotion Code falls within the scope of s316(3)(a) so that all broadcast licensees must comply with it pursuant to the general fair and effective competition conditions. The Airtime Sales Rules The Airtime Sales Rules took effect as a fair and effective competition code issued pursuant to s316(3)(a). The last set of rules came into effect on 1 December 2003. There were two rules: The withholding rule required that all advertising airtime available on ITV1, C4 and Five must be sold. The conditional selling rule applied to all broadcasters, prohibiting them from forcing advertisers and media buyers, who want to buy airtime on one channel, to purchase airtime on additional channels. Ofcom conducted a review of the Airtime Sales Rules in 2010. In July 2010 Ofcom issued a statement containing a decision to remove the rules with effect from 1 September 2010. In deciding to remove the rules Ofcom considered: the changing market landscape; broadcasters incentive to breach the rules; and the ability to deal with issues concerning conditional selling on a case-by-case basis. 32 32 Ofcom s statement can be found here: http://stakeholders.ofcom.org.uk/binaries/consultations/asr/statement/statement.pdf 16

The links between section 316 and other parts of your responsibilities under the UK s competition-law framework, principally the Competition Act and the marketinvestigation provisions of the Enterprise Act Pursuant to sections 369 to 371 CA03, Ofcom has concurrent competition powers in relation to communications matters. Section 369(1) defines communications matters as one or more of: the provision of electronic communications networks; the provision of electronic communications services; the provision or making available of services or facilities which are provided or made available (i) by means of, or in association with the provision of, an electronic communications network or electronic communications service; or (ii) for the purpose of facilitating the use of any such network or service; apparatus used for providing or making available anything mentioned in the preceding bullets; broadcasting and related matters. Under s370 Ofcom has concurrent functions with the Office of Fair Trading to make market investigation references to the Competition Commission under Part 4 of the Enterprise Act 2002. Under s371 Ofcom has concurrent functions with the Office of Fair Trading in relation to enforcement of the Chapter I and Chapter II prohibitions of the Competition Act 1998 and in relation to Articles 101 and 102 of the EU Treaty. In relation to both s370 and s371 it is worth noting that Ofcom s section 3 duties do not apply to the carrying out of these concurrent functions (unless it is a matter to which the Office of Fair Trading is entitled to have regard in the carrying out of those functions). Under s317(2) Ofcom is required before exercising a Broadcasting Act power for a competition law purpose (which would include acting pursuant to s316) to consider whether a more appropriate way of proceeding in relation to some or all of the matters in question would be under the Competition Act 1998. In some circumstances it may also be appropriate to consider whether it would be more appropriate to make a market investigation reference than to attempt to proceed under s316. For example, we considered this in the pay TV process, and referred the pay TV movies sector to the Competition Commission 33. Similarly, the Office of Fair Trading s guidelines on market investigation references suggest that before making a market investigation reference Ofcom should consider the potential 33 http://stakeholders.ofcom.org.uk/consultations/movies_reference/statement/ 17

usage of sectoral powers as well as its powers under the Competition Act 1998/Articles 101 and 102. In considering the future of s316 it may also be appropriate to consider the potential limitations resulting from the provisions of Article 3(2) of Regulation 1/2003, which provides that agreements not prohibited under Article 101 cannot be prohibited under national competition law. 18

An outline of the related issues covered by the EU electronic-communications framework, with a focus on areas of particular relevance to consideration of broadcasting (e.g. conditional access and EPGs) The Common Regulatory Framework (CRF) establishes a harmonised framework for the regulation of electronic communications networks (ECN) and electronic communications services (ECS) by EU Member States. The applicable rules are contained in a package of Directives, in force since 2002 and revised in November 2009, as follows: Directive (2002/21/EC) on a common regulatory framework as amended (the "Framework Directive") Directive (2002/19/EC) on access and interconnection as amended (the "Access Directive") Directive (2002/20/EC) on the authorisation of electronic communications networks and services as amended (the "Authorisation Directive") Directive (2002/22/EC) on universal service and users' rights relating to electronic communications networks and services as amended (the "Universal Services Directive") Directive (2002/58/EC) on privacy and electronic communications as amended (the "Privacy Directive") Together, the Directives establish a pan-european system of regulation with the aim of developing a better-functioning internal market for electronic communications networks and services. This covers all forms of transmissions networks, services and associated facilities, including fixed and wireless telecoms, data transmission and broadcasting. Notably, the CRF does not extend to the regulation of the content carried by such services. The following is an overview of the areas of Ofcom regulation affecting broadcasting that are derived from the CRF. Technical Platform Services 34 (Obligations on Sky) - The regulation of Technical Platform Services (TPS) is derived from the Access Directive (Articles 5(1)(b), 6(1), Annex I). - TPS regulation covers the following (see further below): Conditional Access (CA), EPG Access, and Access Control. - Broadcasters and operators of interactive TV services who wish to gain access to viewers using Sky set top boxes can purchase TPS on regulated terms from Sky. Ofcom has published TPS Guidelines indicating its regulatory approach. 34 Full description of legal basis and framework in Annex 2 of the 2006 TPS Statement http://stakeholders.ofcom.org.uk/binaries/consultations/tpsguidelines/statement/statement.pdf 19

- Broadly speaking and collectively, the TPS regulations require Sky to ensure that its terms, conditions and charges for providing access to its TPS are fair, reasonable and non-discriminatory. In addition, Sky is required to publish charges or the method for determining charges and provide 90 days notice prior to implementing amendments to terms, charges and conditions. Conditional Access - A Conditional Access service enables a broadcaster to restrict access to content that it has made available on a digital platform only to those customers that have been authorised to access it. CA systems typically employ content scrambling and encryption technologies along with an end user authorisation system and decryption technologies operating within the digital receiver (a digital receiver could be a digital set top box with an active viewing card). - On digital TV platforms, CA services are primarily used to enable subscription and pay per view services. Access to specific encrypted channels and content is only provided to those users who have paid (or have committed to pay) for the content. - Legal basis: Article 6 and Annex 1(b) of the Access Directive. Transposed into UK law by sections 45(5), 73(5), 75(2) and 76 of the 2003 Act. Implemented by Oftel on 24 July 2003. - Imposition of various conditional access conditions (CA Conditions) on Sky Subscriber Services Limited (SSSL). 35 - Key conditions: (i) to provide access on fair and reasonable terms; (ii) not to unduly discriminate; (iii) publication of charges; (iv) separate accounting. EPG Access - The EPG listing service involves assigning an EPG channel number to each broadcaster s channel and providing a technical interface by which the broadcaster can deliver and amend programme schedules and related data. - Legal basis: Article 5(1)(b) Access Directive. Transposed into UK law by sections 73(2) and 74(2) of the 2003 Act. Implemented by Oftel in 2003 EPG Continuation Notice and AC Continuation Notice. 36 - Key conditions: (i) provision of access on a fair, reasonable and non-discriminatory basis; (ii) not to show undue preference or exercise undue discrimination; (iii) publication of charges. 35 http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/condac0703.pdf 36 http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/cont_notices/epg_class.pdf 20

Access Control - APIs, interactive and red button services - Access Control (AC) services involve access to certain application programming interfaces (APIs) and access to the digital broadcaster s remote computer hardware and software systems. Such services allow broadcasters to develop software applications such as interactive TV applications, which can be loaded and executed on the digital receiver. These applications may then establish an on-line connection with the broadcaster s network infrastructure to create a client server computing environment. Other AC services also enable the broadcaster to provide viewers with the ability to identify and access interactive applications. - Legal basis: As above for EPG Access. - Key conditions: (i) provision of access on fair and reasonable terms; (ii) not to unduly discriminate of show undue preference; (iv) publication of charges (v) separate financial accounts. Other regulated TPS - Regionalisation (a form of EPG access, providing the ability for broadcasters to provide regional variations to different regions, particularly in relation to advertising and regional programming); and - Geographic masking (a form of CA, to ensure that content is not available to users outside of the target broadcast area to prevent rights issues). Market review regime - The CRF and 2003 Act require Ofcom to conduct forward-looking market reviews in the communications sector, and to impose ex ante Significant Market Power Conditions where it determines that there will be, prospectively, a lack of effective competition in a relevant market. Under the Framework Directive, such obligations are to be imposed only where Ofcom is satisfied that the ex post remedies provided in national and EU competition law are not sufficient to address the problem. - The European Commission publishes a Recommendation on the relevant product and service markets within the electronic communications sector susceptible to ex ante regulation under the CRF. Ofcom is required to conduct market reviews every three years of the markets included in the Recommendation. The current version of the Recommendation (December 2007) 37 contains 7 markets relevant to fixed and mobile telephony (i.e. nothing specific to broadcasting). The first edition of the Recommendation (February 2003) included Broadcasting Transmission Services (Market 18). - Ofcom therefore conducted a market review of Broadcasting Transmission Services (see below). Ofcom retains the ability to conduct a further market review of this sector and impose conditions subject to the relevant statutory tests being met. 37 http://ec.europa.eu/information_society/policy/ecomm/doc/library/proposals/rec_markets_en.pdf 21

Broadcasting Transmission Services market review - Ofcom completed a review of the market for Broadcast Transmission Services in 2005. 38 In summary, the review determined that National Grid Wireless and Arqiva (then Crown Castle and ntl:broadcast, respectively) each had significant market power (SMP) in the provision of Network Access (NA) to their respective networks for the delivery of broadcast content to end users on a national, regional or metropolitan basis and imposed remedies to address that market power. Ofcom s review did not make any finding in relation to the provision of Managed Transmission Services. - Ofcom imposed conditions on each of Crown Castle and ntl:broadcast in the markets in which they respectively had market power as follows: (a) requirement to provide network access to their respective masts and sites on reasonable request; (b) requirement not to unduly discriminate in that provision of network access; (c) requirement to provide network access to their respective masts and sites on cost-orientated terms; (d) requirement to publish a Reference Offer for that provision of network access. - In 2008, Macquarie UK Broadcast Ventures Limited (the parent company of Arqiva) acquired National Grid Wireless, to create what is now the UK s only integrated terrestrial broadcast transmission company. As a condition of clearance for the merger, the Competition Commission used its Enterprise Act powers to accept a series of behavioural commitments from the merged undertaking. Those commitments cover the provision of Managed Transmission Services as well as Network Access. Must carry obligations - Section 64 of the Communications Act enables Ofcom to secure the transmission of PSB channels on ECNs, where the ECN is used by a significant number of end-users as their principal means of receiving television programmes. Section 64 transposes Article 31 of the Universal Services Directive, which gives Member States the power to impose reasonable must carry obligations for the transmission of specified radio and television broadcast channels. - To date, Ofcom has not exercised this power (on the basis that it has not been necessary). Dispute resolution powers - Ofcom has statutory powers under s185-191 of the 2003 Act to resolve disputes relating to network access. These powers are derived from Article 20 of the Framework Directive, which provides that national regulatory authorities are to have powers to determine disputes between parties arising in connection with existing obligations under the CRF between (i) undertakings providing electronic networks or services, or (ii) or between such undertakings and other undertakings benefitting from obligations of access/interconnection derived from the CRF. To the extent that broadcasting related 38 http://stakeholders.ofcom.org.uk/binaries/consultations/bcast_trans_serv/statement/mastsites.pdf 22

matters fall within the scope of Ofcom s dispute resolution functions, Ofcom s powers will be engaged. - Ofcom has jurisdiction to resolve the following types of regulatory disputes under the 2003 Act: (a) a dispute relating to the provision of network access (section 185(1) of the 2003 Act); (b) a dispute relating to the entitlements to network access that a communications provider is required to provide by or under a condition imposed on him under section 45 of the 2003 Act (section 185(1A) of the 2003 Act); and (c) a dispute (which is not an excluded dispute ) relating to rights or obligations conferred or imposed by or under a condition set under section 45 of the 2003 Act or any of the enactments relating to the management of the radio spectrum (section 185(2) of the 2003 Act). Following revisions to the CRF in 2009, these powers could include, for example, the power to resolve a dispute between a broadcaster and a distribution platform covered by the CRF. - Ofcom has a statutory duty to resolve disputes within a 4 month period, unless there are exceptional reasons justifying a longer period. - Ofcom s powers in resolving disputes consist of: (a) making a declaration setting out the rights and obligations of the parties to a dispute; (b) giving a direction fixing the terms and conditions of transactions between parties to the dispute; (c) giving a direction imposing an enforceable obligation to enter into a transaction between the parties on terms and conditions fixed by Ofcom; and (d) to order sums to be paid between the parties representing under- or over-payments in connection with the charges for network access. Listed events - Ofcom has promulgated a Code on Sports and Other Listed and Designated Events. 39 The legal basis is sections 97-105 of the Broadcasting Act 1996, which were amended by sections 299-302 of the Communications Act, and the Television Broadcasting Regulations 2000. The Code is designed to implement the requirements of the Audio Visual Services Directive (which is not strictly part of the CRF). - The listed events themselves are drawn up by the Secretary of State. - The listed events regulation requires that broadcasting rights to those listed events must be offered first to qualifying broadcasters (channels available without payment to at least 95% of the population). 39 http://stakeholders.ofcom.org.uk/binaries/broadcast/other-codes/ofcom_code_on_sport.pdf 23