Regulator sets the fuse for shake-up of pay-TV

Ofcom is ready to force down the prices that Sky charges its rivals for sports and movie channels

Ofcom employees were evacuated from their London headquarters for almost two hours yesterday following a bomb scare nearby. This delay proved unwelcome as the regulator was putting the final touches to a report that could prove explosive to the pay TV market.

After a three-year investigation, Ofcom finally revealed it was ready to publish its final statement on the investigation into the pay TV market in Britain at 7am today.

Despite the hiccup at the 11th hour, the regulator hit the last day of its self-imposed deadline. It was desperate not to be derailed by the Easter weekend and the chaos around the general election, which is expected to be called next week.

Sky is the largest player in the pay TV market, with 9.5 million customers, followed by Virgin with 3.7 million. BT's Vision product has 451,000.

Ofcom's position is clear, as one insider said: "The key motivation for our review is choice. Sky has market power in the Premier League – which is the property everybody really wants – and we want to get it on to a much wider series of channels."

The regulator is expected to force down the wholesale rates that Sky can charge for Sky Sports 1 and 2 and Sky Movies by between 15 per cent and 30 per cent as it looks to bring the programming to more British viewers. Sky Sports 3 and 4 are not included in the review, but Ofcom is expected to word its report so Sky can not move all its premium content to those channels.

Toby Syfret, an analyst at Enders Analysis, said: "The move holds considerable symbolic significance. Whether it will make any financial difference in the first few years is a different question. In the longer term it will." He added: "Up to now there has been no regulation preventing Sky from growing its share of the pay market."

The current average weighted rate card Sky charges is £20.72. That could be brought to between £14.55 and £18.35. Mr Syfret estimated that the hit in the initial year to Sky would be between £25m and £30m.

Virgin Media is the only pay TV provider to provide its customers with Sky Sports and movie content, and complains it makes almost no margin. The wholesale rate card for Sports 1 and 2 is £18.39, while Virgin charges £20.50. Will Draper, analyst at Execution, said the review would allow the cable operator to "improve margins, cut pricing or be more aggressive on marketing". He estimated that the company would receive a £40m cost saving if wholesale prices are lowered by a fifth.

BT also hopes it can grow its subscribers, and thinks the Premier League could be the catalyst for that growth. It has carried out research recently which found that 8 million people without Sky Sports would like it, and half of those would actively consider it if the prices came down. The telecoms group has been the loudest in talking up a price war, with insiders suggesting aggressive pricing of as little as £15 a month for Sky Sports 1. "We want our customers to count in the millions," a spokesman said. "And this would help."

The BT spokesman said: "This will prompt a structural change in the market." Sky's buy through model could come under threat, where customers have to subscribe to a basic package before paying more for premium content, he said.

Ofcom launched its investigation into the pay TV market in March 2007, following representations from BT, Top Up TV, Virgin and the now collapsed Sky rival Setanta Sports that the market was not functioning for consumers and they had been priced out of offering premium content to subscribers.

The regulator put out its phase three document with its proposed remedies in June. Jeremy Darroch, the chief executive of Sky, said at the time that the report "defies belief". The company said it invests £1.3bn a year in content, which is "a considerable risk" and deserves to reap the reward. "BT and Virgin Media do not deserve to be handed a reward at Sky's expense for their repeated failure to invest," Mr Darroch said.

Despite detailed responses to Ofcom, Sky was not optimistic over reversing Ofcom's opinion. Mike Darcy, the chief operating officer for Sky, said: "We don't expect any surprises." He said the expected cost reduction of about 20 per cent "isn't particularly attractive to us," adding: "This will have an immediate impact from wholesale revenues dropping from Virgin. These won't be made up by BT." Sky believes that BT will aggressively target Sky's customers.

"BT said it will introduce a fairly aggressive price, meaning price competition will be a lot tougher than it is now, making it more difficult to keep customers and attract new ones." This is a headache for a company which has been going from strength to strength, despite losing a recent regulatory battle over its stake in ITV. Its move to invest in high definition channels has paid off, with the company doubling subscribers for the more expensive service last financial year to 1.3 million. despite fears that the economic downturn could hurt subscriptions.

Today's decision has wider ramifications, as some of the UK's largest sporting bodies said they were considering legal action against the regulator should the decision go against Sky. The Premier League, Rugby Football Union and England and Wales Cricket Board have all said their profits would suffer from the reduction in wholesale charges yet Sky's rivals believe the rights auction will now become more competitive and bring in new bidders, including from online companies.

Ofcom is expected to offer Sky an olive branch by clearing Picnic. The idea, to bring paid content to digital terrestrial platforms, was shelved after the regulator "put it in the bottom drawer," according to one insider, and Sky has disbanded the team.

Mr Darcy added: "There is nothing that will buy us off," describing the pay TV decision as the company's only focus, adding it would not be distracted "with trinkets".

The report will not be the end of the matter. Sky has made it clear it will appeal against any unfavourable decision. As Mr Darcy put it: "We find this a fairly fundamental attack on the business." The first step will be to take its case to the Competition Appeals Tribunal (CAT) for a stay of implementation. This is crucial as other moves – to appeal against the decision to the CAT and the High Court – will be ongoing as Sky is forced to submit to Ofcom's ruling. To secure the stay, Sky has to prove the move will do irreparable harm to the business.

Even Sky's rivals were not totally happy, as some expressed concerns that Ofcom would not go far enough. "We may be left with a report that leaves everybody unhappy," one said.

Let's get high: Freeview launches HD TV service

Freeview is to bring shows including Doctor Who, Britain's Got Talent and Peep Show in high definition to millions around Britain, on what was hailed as the service's "most important day" since its launch eight years ago.

Freeview officially launched its free-to-air HD service yesterday with the BBC, ITV1 and Channel 4's HD channels, as well as the Welsh-language channel S4C Clirlun.

Ilse Howling, Freeview's managing director, said: "This is an important day for everyone who watches TV in the UK," adding: "HD is coming of age; it is going mass market for the first time."

Freeview offers the largest television platform in the UK, and its HD coverage will be available to 50 per cent of the country by the World Cup. The football tournament, which kicks off in South Africa this summer, is expected to act as a driver for viewers to install the HD service, Ms Howling said.

Today, viewers in London, Newcastle, Leeds, Birmingham and parts of Scotland will be able to watch high definition programming alongside the existing standard definition channels. Viewers will need to buy a new box to connect to an HD-ready TV. Freeview hopes to extend the coverage to 90 per cent by the London Olympics.

Ms Howling backed Freeview's shareholders – BBC, ITV, C4, Sky and Arqiva, the transmission company – in helping to provide free HD, "something no other country has done".

However, the group confirmed that Five had dropped out of taking the fourth slot, and will not have a chance to provide an HD channel on the platform until the next slot becomes available in 2012. Ms Howling said: "Five was supposed to come on board but decided it couldn't," adding it was "a shame". Ofcom has handed the channel back to the BBC, which is currently considering whether to launch a second HD service, Caroline Thomson, the BBC's chief operating officer said.

Freeview has launched a £6m advertising campaign to publicise the new service. HD offers up to five times more detail than standard definition television and higher quality sound.

The Freeview HD box will also offer viewers online catch-up services including the BBC's iPlayer.

Freeview launched in October 2002, taking over the licences from the collapsed ITV Digital. There are currently about 18 million British homes that watch TV on the service.