British Telecommunications plc v Office of Communication (Sky UK Ltd intervening) [2016] CAT 25
A long running legal battle over pay-tv sport rights came to a conclusion in December 2016. The Competition Appeals Tribunal (“CAT”) rejected British Telecommunications’ (“BT’s”) appeal against the Office of Telecommunications (“OFCOM”) decision in 2015 to drop a requirement that it had previously imposed in 2010 on Sky UK Ltd (“Sky”) when wholesaling its sports channels to its rivals including BT.
Background
This case originates from a ruling by OFCOM in 2010, which followed a review that identified competition concerns in the pay-tv market.
OFCOM’s review concluded that Sky had engaged in conduct prejudicial to fair and effective competition in connection with the wholesale of its core premium sports channels and had not constructively engaged with other providers who wished to access its sports channels. OFCOM also stated the terms of the supply agreements Sky had with other retailers weakened the ability of the competitors to compete with Sky, particularly in respect of the high prices charged and the availability of high definition channels. As a result of this, consumer choice was negatively affected and OFCOM imposed an obligation on Sky to offer on a wholesale basis Sky Sports 1 & 2 (including in high definition) at prices which were fair, reasonable and non-discriminatory. This is known as a wholesale must-offer obligation (“WMO”). This decision was given pursuant to the powers granted in ss.316 – 318 of the Communication Act 2003 (“The Act”). The exact wording of s.316 comes under scrutiny in this case, so it is worth setting out in full:-
Communication Act 2003 s.316:-
- The regulatory regime for every licensed service includes the conditions (if any) that OFCOM considers appropriate for ensuring fair and effective competition in the provision of licensed services.
- Those conditions must include the conditions (if any) that OFCOM consider appropriate for securing that the provider of the service does not
(a) enter into or maintain any arrangements, or
(b) engage in any practice, which OFCOM consider, or would consider, to be prejudicial to fair and effective competition in the provision of licensed services or connected services.
Litigation History
OFCOM’s 2010 ruling was appealed in CAT, which held that the WMO was not justified. There was then a further appeal in the Court of Appeal in February 2014 which confirmed OFCOM had the power to make the ruling under s.316 of the Act and agreed with the conclusion made by CAT that the WMO was not justified and was based on incomplete set of conclusions. The matter was to be sent back to CAT for further consideration.
As the remittal proceedings concerning OFCOM’s 2010 ruling were commencing, OFCOM, as they had promised to do in 2010, were conducting an up to date analysis of pay-tv market conditions. The result of this review was announced in November 2015 and it was decided that the WMO was no longer necessary (subject to continued monitoring of Sky’s conduct and market review). BT appealed this decision, claiming that Sky continued to operate in an unregulated monopoly. Sky was then granted permission to intervene in the proceedings in support of OFCOM.
Decision
BT’s grounds of appeal can be broken down in five different elements (albeit with overlap between some of the grounds):-
Ground 1
OFCOM erred in law in its application of s.316 of the Act and acted in breach of its statutory duties under the Act by adopting a “wait and see” approach to Sky’s behaviour and the condition of the market. BT’s argument had two main strands:-
- OFCOM did not carry out a proper assessment of the future risk of Sky behaving in an anticompetitive manner; and
- OFCOM had not acted in accordance with its general duties under the Act specifically in connection with its requirement to promote competition and innovation.
BT placed emphasis on the word ‘must’ at s.316 (2) of the Act, claiming this word conferred an imperative that OFCOM had to act (ie:- impose licensing conditions on Sky) once a relevant risk had been identified.
The CAT dismissed BT’s arguments. Firstly the Judge concluded that the word ‘must’ conferred an obligation to give full consideration of the need to include licensing conditions on Sky, rather than a requirement that OFCOM must include such conditions. The Judge also found that OFCOM had carried out a forward looking assessment on the future risk of Sky behaving anti-competitively. It conducted this assessment and then decided there was no evidence to suggest Sky would refuse to enter into supply contracts without licensing conditions. As part of point (1) above BT had also claimed that OFCOM, when deciding whether to continue with the WMO, should have carried out a proportionality assessment as referred to in the Competition judgment of Tesco plc v Competition Commission [2009] CAT 6 (known as the ‘Fedesa test’). The Fedesa test is very comprehensive but essentially looks at whether a particular regulatory measure is effective in achieving a legitimate aim and is no more onerous than it needs to be. The Judge decided that the full Fedesa test was not necessary and OFCOM only had to conduct a balancing exercise to identify the benefit and burden of the regulation. The CAT decided that OFCOM had achieved this.
In relation to point (2) above, the CAT gave short shrift to BT’s argument, stating that there was no evidence that OFCOM had failed to discharge its duties in relation to the statutory requirements.
The full reasoning on Ground 1 can be at paragraphs 77 to 108 of the judgment.
Ground 2
OFCOM erred in the exercise of its discretion in failing to appreciate that there continued to be a significant risk of Sky engaging in wholesale distribution practices that would be detrimental to the emergence of fair and effective competition. BT argued that OFCOM should have engaged in a more ‘orthodox’ analysis of the market. They criticised OFCOM’s findings on Sky’s behaviour in the upstream market (see paragraph 124 to 133 of the judgment) and the downstream market see (paragraph 134 to 137 of the judgment).
The Judge rejected this point and held that OFCOM had not erred in exercising its discretion in analysing the pay-tv market. He further commented that there was little substance to the idea put forward by BT that competition analysis involved a series of mechanical prescribed tests. The CAT also held OFCOM’s decision that Sky’s behaviour in the upstream and downstream markets was acceptable.
The Judge recognised that OFCOM had previously highlighted concerns it had over Sky’s behaviour (most notably in 2010) but they were perfectly entitled to, after finalising the 2015 review, to decide that the market conditions had changed in a way that meant the original concerns were no longer apparent. OFCOM had found in its analysis that Sky Sports was widely available to consumers with other suppliers providing it outside BT’s arrangement with Sky under the WMO. Therefore the problem the WMO had sought to correct was less apparent (see paragraph 152 – 155 of the judgment for the full conclusion).
Ground 3
OFCOM erred in the exercise of its discretion by directing its analysis on the distribution of key sports content rather than on the product that customer’s purchase, and which is the focus of the statutory remedy under s. 316 of the Act, namely sports channels.
As BT had themselves pointed out, ground 3 was essentially a sub-section of ground 2, therefore for the same reasoning that ground 2 was dismissed so was ground 3 and OFCOM were found to have validly exercised its discretion in its analysis of competition in the pay-tv market (see paragraph 156 – 162).
Ground 4
OFCOM erred in concluding that there was sufficient evidence that Sky would not engage in practices prejudicial to fair and effective competition in the pay-tv market by offering Sky sports channels only at wholesale prices that were too high to allow competition to emerge.
The Judge rejected this ground. He stated whilst BT had made it clear they fundamentally disagreed with the findings of OFCOM in relation to the pricing they had not proved that OFCOM had examined the pricing issues inappropriately. The Judge looked in detail at pricing evidence provided by BT (paragraph 192 – 202 of the judgment), and decided that whilst it was accurate it did not go to the heart of the argument BT was trying to make. BT’s data was relevant to assessing market prices prior to the introduction of the WMO instead of , as it should have been, assessing the market prices after the introduction of the WMO.
Ground 5
OFCOM erred in the exercise of its discretion and acted in breach of its statutory duties under the Act by failing to identify unfair demands by Sky in relation to Sky’s insistence of a ‘grant-back’ provision in its supply contracts. This essentially means that when Sky enters into a supply agreement with other providers it demands that the provider in question, as a condition of getting Sky sports, has to provide its own sports channels (ie: BT sport). BT argued OFCOM should have found the ‘grant back’ provision condition to be prejudicial and unfair and they should have imposed a condition to prevent this practice. This argument is further broken down as follows:-
- OFCOM had previously accepted in 2010 the grant back conditions were unfair in principle;
- The issue was not just confined to BT (but other pay-tv providers);
- OFCOM could not in law rely on the content of the negotiations (over the supply contract between BT and Sky) but had to decide the issue in principle;
- OFCOM fundamentally misunderstood the nature of the supply contract negotiations; and
- OFCOM has ignored the economic modelling evidence put forward by BT as evidence of Sky’s insistence that the ‘grant back’ was purely tactical as opposed to being commercially necessary.
The Judge dealt with these points as follows:-
- OFCOM was justified in deciding that while in principle a ‘grant back’ requirement may raise concerns, they did not apply in this instance. As reiterated throughout the judgment, OFCOM had thoroughly examined the state of the market as well as the conduct of the parties and BT had not provided any evidence which proved OFCOM had failed in its approach;
- Sky freely admits that this issue does not just affect BT, but it is only BT that has raised it as an issue;
- OFCOM was entitled to examine the course of the negotiations between BT and Sky and draw conclusions. The Judge agreed with OFCOM’s analysis that no positions in the negotiations had yet been absolutely decided (referred to as ‘crystallisation’- see paragraphs 232 – 245 of the judgment) and that as such the negotiations were not a reliable indicator of what the outcome would be. There is no error of law in this approach.
- Dealt with at point (3) above; and
- The Judge decided that the economic models put forward by BT were of limited assistance and OFCOM were entitled to decide these were not conclusive (see paragraph 240 – 250 of the judgment).
In addition to the points put forward above, BT also criticised OFCOM’s decision to withdraw the WMO and implement a ‘wait and see’ approach as to whether they needed to impose licensing conditions on Sky. (This point links into the first ground of appeal).
The judge concluded there was nothing wrong with OFCOM’s decision to monitor the market closely and intervene when considered necessary. If OFCOM intervened unnecessarily that would also had negative effects on the market. The Judge commented that OFCOM had acted in accordance with the provisions of the Act and that there had to be clear evidence it acted unreasonably for the decision to be overturned. There was no such evidence. The Judge also highlighted that this flexible ‘wait and see’ approach was perfectly acceptable given the changing nature of the market.
Comment
The Judge commented throughout the written judgment that BT’s points seemed to be based on gripes about the position of Sky and the decisions which OFCOM had made, as opposed to whether OFCOM had correctly dealt with the situation in accordance with its statutory remit. BT’s arguments suffered from a lack of focus as illustrated by the production of the economic modelling and the pricing evidence which would have considerable taken time and expertise to produce, but did not actually support the grounds of appeal.
The ultimate purpose of competition legalisation and subsequent intervention is to benefit the consumer. On that basis, there has to be a question mark over whether the consumer has actually benefited from the splitting of sports rights between Sky and BT. A decade ago (discounting a brief foray by Setanta Sports), sport obsessed consumers simply paid their Sky sports subscription. This contrasts with the current situation where high profile sports are split across BT and Sky, meaning the consumer has to pay more to access all the live sport available. Many will point out that even if you don’t subscribe to all the channels, there is a greater volume of sport available now than there was a decade ago. This is of course a subject for debate, and its also important to note that OFCOM’s concerns about the nature of competition in the pay-tv market have not simply fallen away, as Sky still hold a powerful position in the market. Furthermore given the increasing revenue generated by the acquisition of pay-tv sports rights, the relationship between providers such as Sky and BT and the regulators looks set to remain strained for the foreseeable future.
http://www.bailii.org/uk/cases/CAT/2016/25.html
edwardjeavonssportslaw 