Online rivals kick off battle in pay-TV movie market

It is widely seen as a defensive move by Sky in response to new online video on demand rivals such as Net Flix (the US giant which launched last month), LoveFilm (owned by Amazon), Blinkbox (backed by Tesco) and YouView (a forthcoming set-top box from the BBC, ITV, BT and others).

Net Flix costs just £5.99 a month and LoveFilm from £4.99. Sky hasn't disclosed its internet-only price but it will be cheaper than Sky Movies on pay-TV, which costs upwards of £16 a month.
The market for premium movies is suddenly changing as consumers have more choice and cheaper options - from Virgin Media and BT to Apple's iTunes, Google's YouTube, BBC iPlayer and even Facebook.

That is raising questions about whether the Competition Commission (CC) still needs to intervene to challenge Sky's supposed dominance.

The key issue is Sky's exclusive deals with the big six Hollywood studios - Disney, Fox, Sony, Warner, Paramount and Universal - to show movies for the first time. This exclusive period is known as the first pay-TV window.

The CC has claimed that Sky's position "is restricting competition" and that is leading to "higher prices" and "reduced choice" for consumers.
This matters now because the watchdog is about to publish its proposed remedies as part of its long-running investigation, which must end in August.

The CC's decision matters as it could impose drastic "remedies" that might force Sky to give up some exclusive deals or to drop its wholesale prices.

Sky's pay-TV rivals, Virgin Media and BT, have been calling for just such action for years. A Virgin spokesman insists consumers continue to "pay far too much to watch movies at home". Virgin points to a CC estimate that reckons UK consumers might be over-paying by £50-60 million a year for pay-TV films.

Sky has always disputed these claims. Chief executive Jeremy Darroch told the Evening Standard: "My strong view is that there is no case or need for intervention."

Now the rise of so many online players appears to strengthen Sky's case.

LoveFilm, backed by Amazon, has landed deals with two of the majors, Warner and Sony, for the second pay-TV window - after Sky's first exclusive period. LoveFilm has also paid for some first pay-TV window rights including a deal with Entertainment One, the independent distributor behind the Twilight teen vampire films.

Net Flix, with US stock-market muscle, has a big war chest and is also striking exclusive deals.
Darroch says: "There's more choice for customers than ever before. Net Flix have been pretty clear that they don't see the need for any intervention. They feel perfectly capable of competing with us. The studios don't think there's any real problem."

The big studios' view, expressed by one well-placed insider, is that Sky has been good for their business - by investing heavily in exclusive rights. Virgin and BT are mainly interested in being able to show movies on the cheap and could have bid for rights long ago, claims an insider.

What's more, regulatory intervention almost never works well and if Sky were forced to cut its prices, it could harm the studios' ability to invest in future film-making, says the source.

TV rights generate big revenues for the studios because they can generate as much as 20% of a film's profits.

From the perspective of some of the studios, Sky's dominance hasn't been without problems as it has driven a hard bargain on prices. Yet Sky's willingness to spend has helped to ensure that their films are perceived as being "high value" at a time of piracy and falling physical sales of DVDs.

In this context, the rise of LoveFilm, Net Flix and others is good for the studios. "We've been able to introduce some competition into the market," says Giles Willits, chief financial officer of Entertainment One. "It's a game-changer for us. Just having the options [of not just selling to Sky] has changed the market."

Greater choice ought to be good news for consumers too. Most of us probably aren't even aware of - let alone care about - first or second pay-TV windows. We just want to be able to watch movies easily and cheaply at home.

Even those close to the competition watchdog admit there has been "significant" change recently. So the CC is hurriedly re-assessing the situation, pushing back plans to publish its remedies this month.

However, for Sky's critics, things haven't changed that much. Half-year results show Sky Movies had its "highest ever level of subscribers" on pay-TV.

No figures are given but around 4-5 million would seem a fair estimate.

Meanwhile, Net Flix, LoveFilm, YouView and others are largely untested. And everyone remembers how Setanta challenged Sky over Premier League football rights - and then went bust.

The CC faces a difficult decision.