OFCOM on Sky HD - a bit more bite than first thought?

I didn't have time to have a look at the full OFCOM report when it was first published this week, but digging my way through its 600+ pages on a lazy Good Friday morning I've uncovered a number of promising statements that give me hope we will have the Sky HD sports and movie channels before long. For instance, did you know that:

In March 2009, Virgin Media issued a request for proposals from channel providers wishing to distribute HD content over its cable platform. Sky approached Virgin Media with a proposal to supply a number of its HD channels on a wholesale basis. Sky indicated that due to Virgin Media’s 5/6 channel limit, its proposal focused on the basics and sport HD channel offerings, but Sky also offered to develop “an attractive Sky Movies HD proposal for Virgin Media”.

Nothing came of that, but it's interesting that they were talking about this last year and both sides were up for it. Here are some extracts from the full report for those interested, specific to HD on Virgin. This is a fairly long post but I hope it proves informative to those who want to see more HD channels on Virgin Media. The full report is online: Pay TV Statement. Here we go...

As Sky pointed out ... we [OFCOM] noted that the quality of content was of primary importance in attracting viewers. We said that content was more important than platform features (such as EPGs, DVRs, VoD and HD), which added to convenience or, in the case of HD, to technical quality. We noted that if customers did not want to watch a programme, then the ability to watch it in HD would not change their minds.
In our Third Pay TV Consultation we noted that this view was set out in the context of discussing the importance of premium content, and we continued to see Core Premium content as a key driver of platform choice. However, where the same content was available on two platforms, as Sky’s Core Premium content is on satellite and cable, then the customer’s choice would be determined by other factors, such as the availability of that Core Premium content in HD. In this context, we said, the availability of services such as HD could well make the difference between a customer choosing one platform or another. As such they could be of crucial importance to the competing platform providers.

Sky's own marketing of its HD channels then proves to be its undoing:

Evidence of the importance of HD content
In the course of its response to our Second Consultation, Sky commented that “Such has been the consumer demand for HD that Sky+ HD is the fastest selling additional TV product ever offered by Sky”. Sky has recently promoted this service with the slogan “High Definition. Now it’s for everyone”. A recent Sky marketing pamphlet sent to Virgin Media customers included an illustration comparing the 34 HD channels available from Sky (including Sky’s Core Premium channels) with the seven HD channels available from Virgin Media.
Our 2009 Omnibus Survey indicated that around three in ten Sky HD customers saw HD as crucial. Similarly, three in ten respondents to the survey would not have chosen their pay TV provider (in most cases Sky) if HD services had not been available. Again similarly, two in ten HD customers said they would not consider downgrading to SD even if the price difference went up to £30 a month. These results support the view that a substantial minority of customers see HD as important, and this is likely to mean that having limited HD content would put Virgin Media at a competitive disadvantage.

So Sky can hardly say that HD is not important. Made me smile that!

Negotiations for supply of Sky’s HD Core Premium channels
Sky told us that in March 2009 Virgin Media had sent it a Request for Proposal which stated that Virgin Media was “now keen” to receive proposals from HD content providers. Sky said it had replied, Both Sky and Virgin Media provided us with correspondence relating to negotiations between the Sky and Virgin Media and, earlier, Sky and ntl, which included discussion of HD supply
Discussions between Virgin Media and Sky are ongoing. At the time of publication no agreement has been reached.
In our view, Virgin Media’s 2007 request for wholesale supply of Sky’s HD channels was a genuine opportunity for Sky to make its HD premium channels available to Virgin Media. Sky’s response raised security issues and questioned whether such a deal (either with a wholesale or with a self-retail model) would be worth the endeavour given Virgin Media’s public statements ascribing very little value to HD. However, nothing in the response indicates that it would not have been possible for Sky to take advantage of this opportunity had it wished to do so.
Instead of engaging with this opportunity, Sky’s response raised a series of obstacles to a wholesale agreement taking place, and put the onus firmly on Virgin Media to overcome them.
Moreover, in its written response Sky did not make any concrete proposals, or even suggestions, as to how Virgin Media could address its concerns.
Likewise it is not clear how Virgin Media could have demonstrated to Sky’s satisfaction that sufficient extra revenue would be generated by the proposal, or that Sky would be better off under a wholesale arrangement than a retail arrangement, given the inherent uncertainty of launching a new service.
While Sky’s response left open the possibility of further discussion of these issues, we consider that it also signalled that Sky would be unlikely to take a constructive approach in any such discussions. Sky’s repeated emphasis on a remark made by a Virgin Media executive at a trade conference further indicates its negative view of the proposal.
Negotiations between Sky and Virgin Media since early 2009 appear to have developed considerably from Sky’s position in 2007. However, these have not yet led to agreement, and, as Virgin Media notes, Sky’s security concerns have not yet been resolved. It is unclear whether Sky would have an incentive to reach an agreement following the conclusion of Ofcom’s market review.

Presumably Sky's "security concerns" are being addressed with the rollout of the new N3 encryption on the NGTV platform? Personally, I think the security of cable was a convenient obstacle Sky could throw in rather than a genuine concern, but hey ho, it's soon to be history.

Our view is that, given the increasing importance of HD as a means of viewing premium content, the non-supply of the HD versions of Sky’s Core Premium channels to Virgin Media is and will prevent Virgin Media from competing effectively.

We have a particular concern that the non-supply of HD versions of Sky’s Core Premium channels, and also interactive services, prevents Virgin Media from competing effectively.

To which end, OFCOM states

The wholesale must-offer remedy will apply to high-definition versions of the included channels. High-definition is increasingly important to effective competition, and a remedy which excluded it would become ineffective over time. Sky has suggested that including high-definition in a wholesale must-offer remedy would damage innovation. We do not believe that including high- definition would be damaging to innovation in the way Sky suggests. However, because high-definition is a relatively recent innovation and there is a degree of uncertainty as to the appropriate approach to setting a price, we have decided not to set a price for supply of these channels. Setting prices might bring about supply faster, but doing so particularly in relation to a relatively new service such as high-definition might risk harming incentives for future innovation. Instead we have included an obligation for supply to be on a fair, reasonable and non- discriminatory basis. This should allow scope for commercial negotiation, with the possibility of bringing a complaint to Ofcom as a backstop.

So where does that leave things? Well, first off, Sky and Virgin have been talking for some time although without a final agreement. This is understandable, given that the "elephant in the room" of those negotiations was this very OFCOM report. But now it is published and things can move on (legal challenges permitting). But those legal challenges are likely to focus on the wholesale pricing of the SD channels, and maybe the provision of HD Sky premium channels will happen regardless, especially now that Virgin has greatly improved its capacity and security capability.
Here's hoping.
Happy Easter. As always, comments welcome.