Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc

Overview of report to the Secretary of State for Trade and Industry

27 April 2007

Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.

CONCLUSIONS

The Office of Fair Trading (OFT) hereby reports to the Secretary of State for Trade and Industry (the Secretary of State) in relation to the completed acquisition by British Sky Broadcasting Group plc (BSkyB) of a 17.9 per cent stake in ITV plc (ITV) on 17 November 2006 (the transaction). On 26 February 2007 the Secretary of State, in exercise of his powers under section 42(2) of the Enterprise Act 2002 (the Act), gave a public interest intervention notice (the Notice) to the OFT and required it to investigate and report on the transaction in accordance with section 44 of the Act within the period ending on 27 April 2007.

As required by section 44(4) of the Act the OFT's report contains three principal 'decisions'. These are that the OFT believes that it is, or may be, the case that:

• a relevant merger situation has been created
• the creation of that merger situation has resulted, or may be expected to result, in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services, including the respective UK-wide markets for (1) all TV; (2) premium pay TV; (3) television advertising; and (4) acquisition of premium sports rights, such that further inquiry by the Competition Commission (CC) is warranted, and
• the undertakings in lieu of reference to the CC offered by BSkyB are insufficient to remedy, mitigate or prevent the substantial lessening of competition or any adverse effects which have or may have resulted, or which may be expected to result, from the creation of that situation pursuant to paragraph 3 of Schedule 7 to the Act.

The OFT accordingly reports and advises in accordance with sections 44(3) and (4) of the Act that the test for reference to the CC on competition grounds contained in section 22 of the Act is met.

MERGER JURISDICTION

The OFT believes that it is or may be the case that a relevant merger situation has been created because:

• BSkyB and ITV have come under common control for the purposes of section 26 of the Act as a result of BSkyB having acquired material influence over the policy of ITV, and
• the UK turnover of ITV exceeds £70 million, [see note 1] so the turnover test in section 23(1)(b) of the Act is satisfied.

The principal grounds for the OFT's belief that BSkyB has, or at least may have, acquired material influence over ITV is the evidence of attendance and voting at recent ITV shareholders' meetings. This evidence indicates that BSkyB is likely to represent more than 25 per cent of the votes cast at ITV shareholders' meetings and, as a result, that BSkyB may have the ability to block special resolutions at such meetings. Guidance issued by the OFT, which accords with the long established practice of the OFT and CC in relation to material influence, indicates that in such circumstances, BSkyB may be presumed to have material influence in relation to ITV.

This conclusion is supported by the OFT's assessment of a number of other factors, including the possibility that BSkyB may obtain board representation as a result of its shareholding in ITV.

SUBSTANTIVE COMPETITION ASSESSMENT

The OFT's competition review in this case involves a predictive merger assessment of dynamic markets undergoing technological transformation. For instance, digital switchover commencing in 2008 could well culminate in an equilibrium shift in the balance – and competitive interaction – between the UK's free to air and pay TV platforms. As a result, there is an inherent margin of error in any prospective analysis undertaken by the OFT.

However, this transaction has no plausible efficiency enhancing effects, and the cost of inadvertently leaving competitive harm unchecked could, given the dynamic nature of competition, directly harm the welfare of much of the UK television audiences representing tens of millions of consumers in sectors which generates revenues in the region of ten billion pounds. Consequently, the OFT considers it appropriate to take a cautious approach in this case.

The counterfactual against which the OFT has assessed this transaction is an ITV independent of BSkyB's partial ownership. The OFT's main concern is that BSkyB's stake in ITV poses a risk of a material reduction in strategic competition between, on the one hand, BSkyB, which is dominant in certain pay TV markets, and on the other, ITV, which is the leading commercial free to air player. This concern arises in particular by virtue of the actual or threatened exercise of veto power on ITV's corporate strategies with regard to its competitive direction. The OFT also considers that there will be a dampening effect on ITV's incentives to engage in strategic rivalry with BSkyB.

The key considerations supporting this concern can be summarised as follows:

• as a result of BSkyB's material influence over ITV, the two can no longer be considered independent strategic rivals
• BSkyB holds its stake in ITV at a time when digital switchover is likely to result in an equilibrium shift in the balance between free to air and pay TV
• an independent ITV free to strengthen its digital free to air offering, presents a materially greater threat to BSkyB's market power in premium pay TV markets, and
• there is evidence to suggest that an independent ITV could be an important potential entrant into pay TV in direct competition with BSkyB's business model.

In relation to the sale of TV advertising, the OFT considers that the acquisition will provide the parties with the ability and incentive to share sensitive information and coordinate their behaviour in order to reduce future discounting and/or to reduce innovation within the advertising sector.

In relation to acquisition of premium sports rights, the OFT has not been able completely to dismiss concerns that third parties may be deterred from partnering with ITV to bid jointly for sports rights in competition with BSkyB, due to the deterrent effect of the fact that BSkyB might obtain sensitive information relating to the bid (or other activities of the third party) as a result of the structural link with ITV. This is an area of particular sensitivity given the evidence that joint bidding in relation to a small number of key rights – and in particular rights to the FA Premier League – may be central to any future attempt by ITV to challenge BSkyB's long standing market power in premium pay TV. The concern is therefore that the transaction raises entry barriers for ITV into retail premium pay TV, and is thus linked to other concerns set out above in relation to the impact of the transaction on strategic competition between BSkyB and ITV. This concern would be reinforced if BSkyB were to have board representation.

Third parties also raised concerns that the acquisition would result in a reduction in competition for the supply of news and other premium content; and that BSkyB's shareholding in ITV will provide it with an increased incentive to foreclose access to BSkyB's rivals to the DTT multiplexes and ITV's content. On the evidence available, the OFT considers these concerns too speculative to warrant reference.

REMEDIES

BSkyB has indicated to the OFT that, in order to seek to resolve any substantial lessening of competition identified by the OFT, it would be prepared to offer undertakings in lieu of reference in accordance with paragraph 3 of Schedule 7 of the Act.

The OFT is of the view that the proposed remedies are insufficient to address the competition concerns identified. [ ]. The OFT does not believe that [ ] the remedies offered are sufficiently clear cut.

Accordingly, it would not be appropriate for a decision on reference to the CC to be suspended pending negotiation of suitable undertakings in lieu of reference pursuant to paragraph 3 of Schedule 7 to the Act.

NOTE

1. For the year ended 31 December 2005, ITV's total turnover was over £2.1 billion.

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