Sky making 'excessive profits' from movies

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Sky is making "excessive profits" from its Sky Movies service, the UK's competition regulator has said, hinting at potential forthcoming reform of the pay-TV films market.

In a working paper published on the Competition Commission website, the watchdog reported early evidence that Sky "appears consistently to have earned profits in aggregate in excess of its cost of capital ['excess profits'] in the recent past and over a long period".

In August last year, Ofcom asked the commission to investigate concerns about Sky's sale and distribution of subscription premium pay-TV movies.

The media regulator was particularly concerned that Sky's near exclusive control over first-run movies from the six major Hollywood studios has given the firm an "incentive and ability to distort competition".

The Competition Commission's early findings, published in a document entitled 'Profitability of Sky', are part of a wider regulatory review of the pay-TV market.

Should the commission uphold these initial findings in its final report, Sky could be forced to reduce the wholesale price of its 10 film channels to other broadcasters, as well as change the way it makes subscription video on-demand rights available.

Ofcom's stance on Sky's movie rights came to light after its move last March to cut the wholesale price of Sky Sports 1 and Sky Sports 2 to other digital TV providers. Ofcom opted to refer the film rights investigation to the Competition Commission because it was outside of its powers.

Using data from consultants Oxera, the commission found that "Sky's profitability is not declining and the evidence we have seen suggest that its profits in the near future will increase".

The regulator added: "Some elements of Sky's excess profits may be due to successful innovation or the weakness of its competitors. However, we would not expect such profits to persist for a significant period of time.

"Although Sky has taken significant risks in the past, its most risky investments were many years ago and achieved short payback periods. Therefore it appears to us that Sky's excess profits can no longer be explained by the risk of its earlier investments."

A possible solution to the situation would be preventing Sky from signing exclusive deals with the major studios, meaning companies like the Amazon-owned LoveFilm could benefit from getting greater access to subscription movies.

However, Sky's financial muscle means the firm can pay significantly more than most other providers can afford - the firm paid £343 million to the Hollywood studios in 2008, falling to £272 million last year.

Speaking last summer, LoveFilm group digital officer Lesley Mackenzie said that LoveFilm would be eager to secure deals with all the studios, but "we also know that we can't afford to pay the studios what Sky is paying them".