Most of the noise around Ofcom's 700-page pay TV review last week centred on cash. Most unusually, because this sort of thing doesn't often happen to a Murdoch company in the UK, Sky managed to occupy much of the public moral high ground in the ensuing debate about the price at which Sky will be required to wholesale its premium sports services to other operators. Sky had taken big risks early on and built what is now a very successful pay TV business from scratch. And here was a lacklustre would-be competitor – let's call it BT – that had taken no similar risks with its shareholders' money, being allowed to cash in on the fruits of Sky's labours courtesy of a government regulator. Put like that, it's almost immoral.
In the cool light of day, however, Sky hardly looks like a big loser – at least not in cash terms. True, it may lose some customers to new operators and prices overall may well drop to reflect the new regulated wholesale price. On the other hand, Sky will get significant new wholesale revenues from its new competitors and, crucially, the right to retail directly in its own name to 10m Freeview homes. This is not bad financial news for Sky, and its rising share price strongly suggests that the City shares this view.
The picture changes from about page 327 when Sky is revealed in a rather less flattering light. In the following 30 pages or so, Ofcom analyses, in excruciating detail, how Sky has sought to avoid wholesaling its content to anyone else. Negotiations – some lasting years – have failed to deliver a single deal. Ofcom concludes that in spite of there being some financial incentive and public commitments to do so, Sky has declined to wholesale its premium content for "strategic" reasons. Which is why the "must offer" aspect of Ofcom's ruling is of much greater long-term significance than anything it has said about price. It also offers a clue to what Ofcom thinks is really at stake here.
The pay TV review began life as an investigation into Sky's apparent domination of a small part of the television marketplace, but it has assumed far greater significance. It is now about the whole future development of TV and TV-like services in the emerging digital world. Why? Look at it this way – Freeview has been a huge success by making (albeit limited) digital choice available without the need for a subscription. But it is technically limited. Last week's big announcement about the launch of HD on Freeview merely served to show how far behind satellite and cable digital terrestrial television is. With only five HD channels, Freeview has reached capacity. Sky already has 40 and room for plenty more. Which is why Project Canvas – currently headed for an OFT competition inquiry and still awaiting final approval from the BBC Trust – is so critical. If Freeview cannot leapfrog into the next generation of digital television – with services provided online as well as via broadcast signals – it will surely wither in the face of ever-more attractive services offered by competitors. But next generation TV services will not come cheap.
Who is going to subsidise the boxes and provide customer support services? How is all that to be paid for? By us, the consumers. How? Via pay TV services. Thanks in part to Sky's good work, pay TV now looks like the only viable way of securing the necessary commercial investment in the next generation of TV. It follows, therefore, that without access to premium content, no pay TV business of scale can be built. And that is why Ofcom is determined that Sky cannot be allowed an effective monopoly of that content, no matter that it has achieved that position through being an enterprising and well-run business. And that is what the pay TV review is really about – the future of TV.
