In March 2012, however, Sky made the unexpected announcement that it was cutting the BBC’s carriage fees by 40% from July 2012, and would reduce them by another 27% from 2014, with the other PSB broadcasters also receiving major carriage fee reductions. One might have expected this to result in a significant softening of the opposing views, but it soon became apparent that the terrestrials were determined to push through a no-fees scenario at the very least, with Adam Crozier (ITV’s chief executive) and John Tate (BBC director of policy and strategy) both welcoming the Sky carriage fee reductions but making it very clear that they did not go far enough. Since then the debate has intensified with Culture minister Ed Vaizey coming out in favour of the terrestrials at the Oxford Media Convention in January 2013, calling on Sky to stop charging the BBC, ITV, Channel 4 and Channel 5 retransmission fees or face potential government intervention, though he was also quick to point out that the government would not rush into “a regulatory solution” and he believed that there was “no reason the market shouldn’t be able to work out a fair and equitable solution as things stand.”
Needless to say, no such equitable solution has yet materialised, though there has been a lot of sabre rattling by both sides in the last few months. Sky has launched a vigorous defence of its position insisting that the fees it charges the terrestrials are “platform contribution charges” to cover the cost of investing in and running the Sky platform rather than “retransmission fees”, and are thus no different from the utility bills or rent that the terrestrial broadcasters have to pay as part of their normal operating costs. Sky also makes the point that as the terrestrial channel portfolios are free-to-air on the Sky platform, whereby viewers with lapsed subscriptions (or those taking its non-subscription ‘Freesat from Sky’ service) can still access these channels, they aren’t entitled to a share of its pay-tv revenues. The terrestrials, on the other hand, argue that (free-to-air or not) their channel portfolios are an integral part of Sky’s offering and account for such a large proportion of viewing on the Sky platform that many subscribers would simply choose to leave the platform if they could no longer access the terrestrial channels through their Sky boxes and EPGs. As Sky benefits significantly from carrying the terrestrial channels, it is only fair, so the argument goes, that they should pay the terrestrials rather than the other way round, with a zero carriage cost approach being the very least that should be on offer. It is also often pointed out that internationally, including in the US, it is the platform operators who pay the major networks a retransmission fee and not vice versa. The terrestrials also make the point that they are much more likely to use the money they would save (or even earn) to fund domestic productions, although Sky would argue that it too has invested heavily in UK originated content in recent years.
So, what is one to make of these polarised positions and what is the final outcome likely to be? Regulatory measures aside, much will of course depend on the clout each side has, and with this in mind it is interesting to note that despite Sky’s relatively recent concessions the terrestrials (most notably the BBC) have remained bullish in their calls for retransmission fees to be scrapped altogether, with this position often being presented as the bare minimum they would find acceptable. Is this confidence justified? Looking at the performance of the 5 main terrestrial PSB channels (BBC1, BBC2, ITV, Channel 4 and Channel 5) on the Sky platform since 2003, one would certainly have to say that it is.
The combined Individuals 4+ Share of the 5 main terrestrial PSB Channels on the Sky platform grew consistently year-on-year from 36.7 in 2003 to 43.5 in 2010, an increase of 6.8 Share points (up 18.5%). The growing dominance of the terrestrial PSBs on the Sky platform over the 2003 to 2010 period is even more apparent when we include the viewing to their spin-off channels (i.e. BBC3, ITV2, E4, 5*, BBC4, etc.), with the combined Individuals 4+ Sky platform Share of the main PSB’s and their spin-off channels (referred to from here on as the terrestrial PSB channel portfolios) rising from 44.2 in 2003 to 56.4 in 2010, an increase of 12.2 Share points (up 27.6%).
This was of course a time when the terrestrial PSBs were under great pressure, with the accelerating pace of the digital switchover threatening to rapidly erode their dominant Share of the UK television market, as ever more viewers switched from an analogue terrestrial environment (where the 5 main terrestrial PSBs were the only available channels) to a digital multichannel one, where the choice ran from a few dozen to hundreds of channels. Their strategy was to fight back by launching more digital spin-off channels and commissioning more compelling and engaging content, designed to help win back viewers in an environment of ever increasing choice. The strategy paid off and largely mitigated the negative impact of the digital switchover on their channel portfolios across the UK television market as a whole, and in an already fragmented environment like the Sky platform actually resulted in the substantial growth in Share over the 2003 to 2010 period noted above.
Faced with this growing dominance of the main PSBs and their free-to-air spin-off channels on the Sky platform, it was only a matter of time before Sky fought back with a strategy designed to drive viewers back to its pay-tv channel services. On the 1st of February 2011 it launched Sky Atlantic as part of a major Sky EPG reshuffle that was specifically designed to put pay-tv channels in more prominent EPG slots, including Sky’s recently acquired Virgin Media channels of which Living (re-branded as Sky Living) was moved into a slot on the first page of the Sky EPG. This was followed in June 2011 by the announcement it would increase spending on original UK television programming to £600m a year over the next three years – an increase of more than 50%. Unsurprisingly, 2011 therefore also marked the first year that the Share of the terrestrial PSB channel portfolios actually fell (by 0.5%, down 0.3 Share points to 56.1) on the Sky platform, after having grown consistently at a CAGR of 3.5% since 2003. There was a further decline in Share in 2012 (down 0.6 Share points to 55.5, a fall of 1.1%), despite the fact that the BBC would have benefitted significantly from the London Olympics, though a significant part of that gain would have come at the expense of the other PSBs. Looking at Jan-to-May 2013, however, there is clear evidence that this recent downward trend in the Share of the terrestrial PSB channel portfolios on the Sky platform is petering out, with the Jan-to-May 2013 Share of 55.0 only being 0.2% lower than the Jan-to-May 2012 Share of 55.1.
Despite making some modest inroads, it would therefore be true to say that Sky has been unable to dislodge the terrestrial PSBs from their dominant position on the Sky platform, with their channel portfolios currently still accounting for well over half (55%) of Sky platform viewing. With the government also coming out in support of retransmission fees for the terrestrial PSBs being scrapped, one would have to give them the edge in this row eventually being settled in their favour, though one should also never rule Sky out when it comes to standing their ground. Whatever the outcome, the underlying drive by both Sky and the terrestrials to retain their market positions by investing in innovative new content and technologies will continue to benefit consumers, with the UK television market remaining one of the most innovative and advanced in the world.
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