Competition In The Television Sector

Originally published in Lawrence Graham's 'SmartLaw' newsletter, March 2007

© Lawrence Graham LLP

The rapid pace of change in communications technology means that soon it may no longer be appropriate to look at television programming in isolation. This is making the regulators’ lives a lot more challenging, as the fall-out from the conjoining of BSkyB and ITV has highlighted. Convergence is no longer just a theory. Anyone who wants to watch programmes traditionally found only on the telly can now turn to their computer instead, or reach for their mobile. On the PC desktop there has been a burst of new offerings, from the near-legendary YouTube to the extensive Internet content uploaded by television networks like the BBC, whose iPlayer, for example, offers ondemand access to a wide range of downloadable television and radio. In the mobile telephone sector 2005 saw a range of channel operators trying out TV on mobile handsets. Deals between some of the biggest names in both industries were the result.

Against this background of technological change, recent corporate developments in the sector have been particularly striking. At the end of November 2006 BSkyB announced that it had acquired a 17.9% stake in ITV Plc for £940 million (equivalent to 135 pence per share). ITV announced simultaneously that it was rejecting a takeover bid by NTL at 120 pence per share, saying that the offer was too low to merit consideration.

Richard Branson, holder of an 11% stake in NTL, promptly complained that the acquisition by BSkyB of a stake in ITV was anti-competitive, arguing that it should be considered by the Office of Fair Trading (OFT) under the UK merger control rules. Following Branson’s comments, communications regulator Ofcom announced that it was considering whether or not there had been a change of control over one or more of ITV’s licences and invited ITV and BSkyB to comment on this. NTL’s subsequent submission to the OFT also argued that the OFT should examine the BSkyB acquisition. On 6 December 2006 NTL confirmed that it would not make another bid for ITV as long as BSkyB retained a blocking stake.

The story of these competing bids for ITV raises a number of interesting issues. By way of background, it should be noted that BSkyB, ITV and NTL have already got ‘form’ with the OFT. In December 2002 the OFT investigated whether BSkyB had breached the Competition Act 1998 by abusing a dominant position. It found that whilst the company was dominant in the wholesale supply of certain premium sports and film channels, there had been no abuse. In February 2003 the OFT recommended that the proposed merger of Carlton Communications Plc and Granada Plc (which came together to create ITV Plc) should be referred to the Competition Commission because it raised concerns principally in relation to the sale of TV advertising. The Competition Commission agreed and permitted the transaction to proceed only on the understanding that the parties agreed to a number of remedies, the most important being that all of the existing advertising customers of both parties should be allowed to renew their pre-merger contracts with the terms unchanged. In December 2006 the OFT cleared NTL’s acquisition of Telewest Global Inc; the two companies had been major competitors in the pay-TV, telecommunications and Internet access sectors.

Both Ofcom and the OFT are now looking at the latest ITV deal. Under the Communications Act 2003 Ofcom must review the likely effects of any change in the control of any company that holds a licence to provide Channel Three services. The Act also provides that such a company cannot merge with one that owns 20% or more of the national newspaper market. These provisions form part of a network of rules designed to maintain pluralism in the ownership of the various national media. It is well known that Rupert Murdoch, owner of BSkyB, also has a large share of the national newspaper market through News International. But, since BSkyB has acquired only a 17.9% stake in ITV, it seems unlikely (though not impossible) that the acquisition will be found to have resulted in a change of control of ITV.

The OFT applies a different analysis. Under the Enterprise Act 2002 it may consider any "relevant merger situation" and investigate whether it has, or may be expected to, result in a substantial lessening of competition within any UK market or markets. If so, it must then refer the matter to the Competition Commission for a full investigation. A relevant merger situation exists when two or more entities are brought under common ownership or control and where either: (1) the UK turnover of the target is greater than £70 million; or (2) the parties together have a share of supply in the UK greater than 25%. In the present case ITV’s UK turnover is above the £70 million threshold so the issue at stake is whether or not it has now come under the control of BSkyB.

In this context ‘control’ does not necessarily mean a stake of more than 50%; it instead depends on the full circumstances surrounding the acquisition. In some instances the OFT has found that control (in the sense of material influence) has been acquired with stakes as low as 15% in light of other factors in the overall deal. NTL has argued to the OFT that the 17.9% stake acquired by BSkyB could carry more weight than the figure alone implies because only two-thirds of ITV investors typically vote at annual meetings. This argument appears to have had at least some impact at the OFT; on 12 January this year it announced that it believes that it may have jurisdiction under the merger control rules and issued a formal invitation to comment.

The third relevant piece of legislation gives the Secretary of State for Trade and Industry the power to intervene (under section 42 of the Enterprise Act) in "relevant merger situations" involving media companies where he considers that there are public interest grounds for doing so. The grounds are laid out in the legislation and relate to the need to maintain pluralism and quality and a commitment to obtaining broadcasting standards. Where the Secretary of State issues such a notice, the OFT must report to him on the competition aspects of a transaction and Ofcom must report on the public interest considerations. The Secretary of State must then decide whether to make a reference to the Competition Commission. On 26 February 2007, the Secretary of State used his powers under section 42 for the first time, to intervene in the BSkyB/ITV deal. The OFT and Ofcom must report to him by 27 April 2007, the task for Ofcom being to consider the need for sufficient plurality of media ownership in the context of this deal.

The ITV situation thus provides the opportunity to consider two fascinating aspects of this fastchanging industry: media pluralism and the market(s) in which competition takes place.

The media ownership rules have prompted two major reviews in recent months. In November 2006 an Ofcom report concluded that at present there is no need to review the current rules. Shortly after, in January 2007, the European Commission announced a three-step programme to achieve an understanding of the measures necessary to ensure media pluralism. As part of its announcement the Commission noted that, while merger control rules play an important role in preventing the creation or abuse of a dominant market position and in ensuring access for new entrants, they do not replace national media concentration rules and other measures to ensure media pluralism.

Defining the markets in which the parties operate will be particularly challenging. In its decision on the NTL/Telewest merger the OFT touched on the possibility that the increasing tendency to bundle pay-TV, telecommunications and Internet services into a single ‘triple play’ package (or ‘quadruple play’ if telecommunications is split into fixed and mobile) may create its own frame of reference. It also considered whether the merger could result in co-ordinated behaviour between BSkyB and the merged NTL/Telewest entity in the pay-TV sector to block third-party channels. For the current ITV deal it is likely that the OFT will have to probe these issues in greater depth. The deal could have a number of other anti-competitive effects, particularly in the provision of news, bidding for sporting rights and ownership of Freeview. The competition authorities have already shown a strong desire to keep the sports rights bidding process unencumbered by cross-shareholdings. ITN (in which ITV and BSkyB each has a 20% stake) is BSkyB’s main commercial news rival. Similarly, Freeview was set up as an alternative to BSkyB. But now, through its interest in ITV, BSkyB could perhaps exercise influence beyond its original 20% share, and possibly even create an opportunity to run down Freeview.

Whether the regulators, assisted by NTL, will have the ability to halt the advance of the Murdoch media empire remains to be seen.

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