Sky's stranglehold over premium movies on pay-TV could be challenged next month when the Competition Commission is expected to confirm action to weaken the satellite broadcaster's exclusive grip on the rights to Hollywood films.
In February, the UK's competition regulator said that Sky was making "excessive profits" from its Sky Movies service, hinting at potential forthcoming reform of the pay-TV films market.
In a working paper, 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".
The commission was asked by Ofcom in August last year to investigate concerns about Sky's sale and distribution of subscription premium pay-TV movies after receiving complaints from BT, Virgin Media, Top Up TV and the now-collapsed Setanta UK.
Ofcom 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 Guardian today reports that preliminary findings over the last few weeks have indicated that the commission feels the Sky Movies case requires action. Its provision decision will be officially announced in mid-August.
Sky Movies costs Sky around £280 million a year to run, but it also attracts around a third of the UK's pay-TV subscribing households, either via Sky or on Virgin Media.
The commission is understood to view the prices that Sky wholesales its movie channels to other broadcasters as excessive, while Sky's exclusive and high price contracts with the six major Hollywood studios mean no other provider can afford to bid for the rights.
The newspaper also reports that the commission has decided that Sky has prevented BT and Virgin Media from developing their own services for selling films via subscription video on-demand (SVOD). Ofcom previously criticised Sky for its "ineffective exploitation" of SVOD rights, as it only makes them available on computers rather than TV sets.
Rival operators, such as the Amazon-owned LoveFilm, claim that they are being hindered in the digital space from making significant profits because Sky's exclusive SVOD deals limit them to offering new release films via transactional video on-demand (TVOD), essentially pay-per-view, rather than via subscription.
In a paper published last month, the commission said: "It is likely that Sky's rivals would have paid lower prices for Sky's… movie channels, [and] would have been able to innovate more in terms of having greater flexibility to package and promote products, and would have been able to launch products earlier."
Ofcom targeted Sky's movie rights after its move in March 2010 to cut the wholesale price of Sky Sports 1 and Sky Sports 2 to other digital TV providers. The regulator opted to refer the film rights investigation to the Competition Commission because it was outside of its powers.
Possible action by the commission could include cutting the wholesale price of Sky Movies channels, or setting the rules about how the Hollywood studios sell movie rights in the UK. For example, there could be a stipulation that no more than 50% of their films should be sold to a single operator.
A Competition Commission spokesman said: "These are preliminary working papers and thus represent our latest thinking, rather than conclusions on any issue. The provisional finding will be published in August."
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