Digital TV war ups stakes

By media correspondent Nick Higham

The New Year begins with a cloud hanging over the commercial media - a cloud called "slump" whose exact size, shape and duration no-one knows.

The uncertainty is illustrated by ITV's contrasting fortunes in December and January.

December's advertising revenue, expected to be down as much as 30% compared with the same month in 2000, did indeed fall, but only by 8% thanks to a last-minute rush from advertisers.

But January's revenue is expected to be down up to 15%.

ITV Digital says BSkyB is abusing its powerful position

This Christmas was a gloomy time for many of those who work in the media, as employers laid off scores, hundreds and in some cases thousands of employees in an effort to cut costs to fit shrinking revenues.

ITV Digital, NTL, Channel 4, Granada, Carlton and a host of internet companies all announced lay-offs.

Some of those who kept their jobs were asked to accept pay freezes. Ambitious projects and plans for expansion were scaled down or scrapped.

One thing that has not been scrapped is the campaign by ITV Digital and the cable companies against what they claim is BSkyB's abuse of its powerful position in the pay-TV market.

As the year ended they were able to claim a victory when the Office of Fair Trading (OFT) announced that Sky had broken the law by acting uncompetitively.

BSkyB is the market leader in digital TV

The company could be fined up to 10% of its turnover since March 2000 - rather more than £300m.

Sky still has a chance to overturn the decision.

Only now that the OFT has announced its proposed finding does Sky get a chance to make formal representations - although in the 12 months since the OFT has been on the case "truck loads of documents" (according to someone involved) have been sent over from Sky's Isleworth HQ.

The OFT says Sky has a dominant market position - Sky Digital accounts for more than half of all multi-channel homes and Sky's film and sports channels have snapped up virtually all the most attractive premium content.

But what is at issue is not what Sky charges its own subscribers, rather what it charges its competitors to carry Sky channels.

Sky Digital has 5.5 million subscribers

The OFT thinks the prices are too high to enable them to make a decent profit.

It also says the way Sky's wholesale prices work, with a complex system of deep discounts for taking more premium pay channels, makes it very difficult for other pay services (such as ITV Sport) to break into the market.

Sky says the pricing structure the OFT objects to is one it has in the past explicitly approved - and that those deep discounts are partly designed specifically to increase its competitors' chances of making a profit.

ITV Digital especially hopes action by the regulator might force Sky to change, and give the struggling digital terrestrial operator some relief from the financial pressure it finds itself under.

But it will have to wait at least six months before anything happens - the OFT says it will not make a final ruling until May - and even if it gets what it wants it is likely to be shareholders not subscribers who see the benefits.

E-mail: [e-mail]

A version of this article appears in the BBC magazine Ariel.