Sky—written evidence (PSB0042)

Public Service Broadcasting in the Age of Video on-demand

Response to the House of Lords Select Committee on Communications Inquiry

1. Executive summary

The UK content sector is in a strong position.  Viewers have more choice and quality than ever before, and investment in UK original content is at an all-time high.  These positive outcomes are driven not only by the Public Service Broadcasters (‘PSBs’), but the wider sector as well.  The UK’s mixed ecology means it continues to punch well above its weight on the global stage.

Sky’s own contribution to this is significant and growing.  As a broadcaster we are producing an increasing amount of original British content.  As a platform, we act as a significant enabler of the PSBs and other broadcasters that produce original UK content.

It is undeniable that the PSBs and others are facing increased competition for viewing from new entrants such as Netflix and Amazon.  But it’s important to place this in the appropriate context:

• Assertions about shifting audience habits are often overstated by media commentators.   The TV set continues to be the main way in which UK viewers watch content at home, representing around 90% of all content viewing.  Broadcast content continues to account for over 70% of viewing.  ‘Traditional’ methods of watching content remain pre-eminent.

• The PSBs occupy a strong position in the market.  They dominate viewing in the UK, accounting for around two-thirds of all content viewed on a TV set.  They have demonstrated themselves to be highly capable of competing effectively for viewers in the face of increased competition.  And they retain a significant set of competitive advantages, most notably their universal availability and focus on local content, which dominates viewing by UK audiences.

• Simplistic and inaccurate comparisons can overplay the scale of the OTT players spending on content, and the extent to which this translates into competition for viewing in the UK.  While the likes of Netflix have high levels of total content spend, the majority of this spend relates to the purchase of content from other broadcasters.  Netflix’s spending on original content is spread over a large number of countries and multiple release windows.

Notwithstanding this, changes in behaviour of certain demographics – specifically younger viewers – may pose challenges which all broadcasters, including the PSBs, will need to recognise and respond to. 

The PSBs are well placed to do this.  Their key strength relative to global competitors is a deep investment in local content, which audiences continue to value.  Continuing to produce this, and making it as widely available as possible, will be the most successful strategy to counter the competitive threat.  In doing this, PSBs (and indeed all broadcasters) will need to pay particular attention to making their output and services appealing to younger audiences.

Collaboration is likely to play a key role in future strategies.  The PSBs have significant opportunities for collaboration in an increasingly globalised market, including with each other, new entrants, and indeed Sky.

Sky can deliver significant benefits to the PSBs, building on the value our services already drive.  Sky’s platform combines our multi-national scale with a deep local focus, placing British content at the heart of our proposition.  Our services provide a blend of both linear and on-demand viewing, allowing both types of consumption (which each bring different benefits to the PSBs) to flourish.  Viewers can also move seamlessly between different providers, helping retain aspects that are key to sustaining the PSB ecosystem. 

The concern, however, is that rather than embrace these opportunities, the PSBs instead seek to fall back on regulatory responses and distribution strategies that may exacerbate the problem – for themselves, the wider sector, and audiences.

The PSBs are calling for prominence regulation to be extended to the on-demand environment, including to search and recommendations.  While Ofcom will report in the summer on this issue, policymakers would do well to adopt a cautious approach to reform:

• There is no evidence to suggest that intervention is required.  Ofcom’s own consultation shows that the PSBs’ content is easy to find on all major TV platforms.  This is unsurprising, given their continued popularity and the commercial incentives of TV operators.

• Introducing regulation could have significant unintended consequences that would negatively impact audiences and the UK content sector more widely, harming innovation and making it more difficult for viewers to find the content they want to watch.  In particular, it risks rewarding predominantly commercial services that do not contain relevant PSB content, without the public getting anything in return.

In fact the only time PSB content is difficult to find is when they refuse to make it available to platforms.  In this context, the BBC’s approach to distribution – which favours a standalone iPlayer app over alternative approaches – limits the choice licence fee payers have to watch content in ways which they find convenient.

A ‘player first’ strategy, from the BBC or other PSBs, represents a threat to the sustainability of the PSB ecology.  By placing viewers in a ‘walled garden’ app environment where only programmes from one broadcaster are available, the PSBs remove the ability for viewers to move easily between different providers, which in the linear world increases reach (and ultimately revenue).  Smaller PSBs and non-PSBs are likely to lose out in such a scenario.

At Sky, our starting position is always that we want to work with broadcasters in the interest of viewers.  The PSBs should support innovation in the UK broadcasting sector by providing their services in all the ways that audiences are watching.  And policymakers should prioritise measures that would benefit all contributors to the UK content sector, avoiding regulation that would restrict the innovation of platforms which are vital to the PSBs’ sustained success in a globalised marketplace.

2. Introduction

Sky welcomes the opportunity to response to the House of Lords Select Committee call for evidence on Public Service Broadcasting in the age of video on-demand.

The call for evidence states that the aims of the Inquiry are to investigate:

a)           whether the popularity of video on-demand services has made the concept of public service broadcasting redundant, in whole or in part;

b)           if so, what form public service broadcasting should take in future and how it could remain financially viable; and

c)            what action policy-makers, regulators and public service broadcasters should take.

Underpinning the Inquiry is an implicit central premise that the arrival of well-funded OTT players has fundamentally altered the competitive market in which the PSBs operate.

In general, we consider that the debate on this issue frequently overplays to some extent the scale of the challenges faced by the PSBs and underplays their ability to address those challenges.  This Inquiry is therefore timely as it enables a realistic assessment of the current market context.

A balanced appreciation of the significance of the challenges faced by the UK PSBs is critical because it will ensure that any policy responses are focused on the real drivers of change and proportionate to the challenges faced.

This rest of this response is structured as follows:

• Section 3 provides a factual assessment of the UK content sector, covering audience preferences, the position of the PSBs, and the competitive threat posed by new entrants.

• Section 4 gives an overview of Sky’s role in the UK content sector, both as a platform operator and a broadcaster.

• Section 5 discusses the strategic and policy implications for operators.

3. The UK Content Sector

3.1              The UK content sector is performing strongly and delivering for audiences

The UK has a dynamic and competitive content sector that provides viewers with access to a vast array of original British programming, as well as a large range of programmes produced in other countries.  By almost any measure, UK content is more widely available than ever before.  Thanks to the near ubiquity of digital television platforms, the high rate of broadband penetration in the UK, and an explosion in online services from PSBs and non-PSBs alike, audiences enjoy an unprecedented level of choice.

In tandem with this, investment in UK television production is at an all-time high, driven by a wide range of different channels and services, and the variety of sources for funding content creation.[1]

These positive outcomes of huge audience choice and significant investment opportunities are fundamentally driven by the strong ‘mixed ecology’ of the UK’s audiovisual sector, which sees significant contributions from a variety of sources:

a)           At the heart of the system are the PSBs, who together spend £2.6bn on original British content per annum.[2]  Licence fee funding gives the BBC the ability to deliver public service content that may not otherwise be commercially viable to produce, while commercial PSBs receive significant regulatory benefits that allows for an advertising-only model that maximises audiences.

b)           Growth in spend on new British programming has predominantly been driven by the multi-channel sector, which now invests a further £1.1bn a year in UK production.[3]  Sky’s own investments account for a significant proportion of this spend, creating high-quality British content across a wide range of genres. 

c)            Beyond this, a variety of other non-PSB sources – including new on-demand only players and production companies themselves – have provided additional funding, either through direct co-production investment or deficit financing.  We estimate these additional contributions to be in the region of £500m.[4]

It is critical, therefore, that future policy in this sector is developed with a clear appreciation of its impact on the strength of the UK’s mixed ecology, rather than be narrowly focused on the impacts on PSBs.

3.2              The PSBs continue to dominate viewing in the UK

With the changes taking place in the sector it is easy to be distracted from the extent to which viewing of ‘traditional’ television – programmes broadcast on TV channels – together with viewing via catch-up services, on TV sets continues to dominate TV viewing in the UK, and the continued dominance of the PSBs’ services within that viewing.

As BARB figures show, more than 80% of viewing of content in the UK continues to be live viewing of broadcast linear television channels on TV sets, together with programmes recorded from broadcast and watched either on the same day as broadcast or within a relatively short time after broadcast.[5]  This is likely to be the case for the foreseeable future.

Within both linear broadcast and catch-up TV, the primary PSB services (i.e.  BBC One and Two, ITV1, Channel 4 and Five) continue to deliver around half of all viewing.  Once the PSBs’ portfolio channels are taken into account, they continue to deliver around 70% of measured TV viewing.[6]  The PSBs have maintained salience even in an era where viewers have access to hundreds of alternative sources of content.

3.3              Competition has come from new entrants – but the extent of this is often overplayed

Sky does not seek to downplay the changes that are taking place in the way that UK households watch content.  But it is critical that these changes are evaluated in the appropriate context, to ensure they are not overstated.

With the exception of younger demographics (discussed in more detail below), the evidence does not suggest there has been any fundamental shift in viewing habits in the UK.  Audiences continue to want to watch a broad and diverse array of TV programmes and movies, and the TV set continues to be the dominant way of doing so at home.  Although estimates vary, it is likely that around 90% of viewing of content at home continues to be via TV sets in the UK.[7]

There has been growth in the amount of catch-up content consumed via TV sets (both through recordings and catch-up services), to the extent that this is now seen as a normal part of TV viewing.  BARB’s ‘gold standard’ measure of audiences for TV programmes via TV sets now includes both live viewing and viewing within seven days of broadcast.  Catch-up TV is not a challenge for the UK PSBs – they have all delivered effective catch-up TV services, which has enabled them to share in this growth.

Technological change has, of course, enabled the introduction of new ‘over the top’ content services to the market (in particular Netflix and Amazon), which carry a range of attractive content.  Much of the viewing of these services occurs via the TV set, meaning that UK households have indeed shifted some of their TV set viewing from existing services to those new services.  But the incremental impact of this remains relatively small – viewing to ‘traditional’ television services (i.e.  PSB and non-PSB broadcasters) fell by around 20 mins per day between 2015 and 2018.[8]

3.4              Increased competition in the UK content sector is not a new phenomenon

PSBs have faced major expansions in the quantity of content provided to UK households in the past, first with the arrival of multichannel television in the early 1990s, and again with the introduction of digital television in the late 1990s which gave rise to a large expansion in the number of television channels available in the early 2000s.

As a result, the UK PSBs have been competing against the output of US television networks, major pay networks (such as HBO, AMC and Showtime), and movie studios for many years now.  The vast majority of this content (which represents significant levels of investment) already appears on competing television channels in the UK, and has done for many years.  Yet as highlighted above, the PSBs were able to maintain their leading position.

The introduction of new competitors, in the form of Netflix or Amazon, is not substantively different to previous competition the PSBs have faced.  Although they are delivered using different technology (‘over the top’, via the internet, rather than terrestrial, cable or satellite), and on a different basis (entirely on-demand rather than a mix of scheduled channels and on-demand), as with previous new entrants, they primarily serve to increase the amount of content available to audiences.

3.5              The extent of relevant content spending by new entrants is often overstated

A great deal of attention has been focused on the entry of these firms specifically into the production of television content.  Figures on content spending by new entrants are often cited in support of a view they constitute something of an existential threat to existing TV broadcasters.  There are, however, a number of reasons to exercise caution on this issue:

a)           Content spend figures are often misreported or misinterpreted.  For example, several reports asserted that Netflix intended to spend $7-$8 billion on original content in 2018.  In fact, that figure represented Netflix’s total content budget, covering licensed content as well as Netflix original series.  Most of Netflix’s licensed content (which represents the majority of the overall content spend) is already distributed by other pay TV services in the UK.[9]

b)           Operators’ content spend cannot be easily compared on a like-for-like basis.  Operators differ significant in terms of the types of rights they acquire.  In general, global SVOD operators like Netflix look to acquire rights covering a large number of countries and multiple release windows, so that content remains available to their subscribers as part of their content libraries.  By contrast, PSBs’ key interest is in first run and catch-up rights for the UK for programmes that will appeal specifically to UK audiences.  The former rights will be much more expensive to acquire than the latter.

c)            Content spend does not correlate to output hours.  Netflix’s original content production has in general seen large expenditure on a small number of TV series, meaning that the amount of additional programming being made available to viewers (and therefore the level of competition faced) is small.[10]

Therefore while it is undeniable that this new entry into content production, at an unprecedented scale, represents a significant new factor in the content sector, the potential impact of such spending on competition for viewers in the UK can be exaggerated.

3.6              Contradictory positions on the impact of OTT services on PSBs

We often hear contradictory perspectives relevant to the extent of the threat posed to UK PSBs by the global OTT players.  It is asserted that:

(a)        the global OTT players focus on investing in content that is designed for US and/or global audiences;[11]

(b)        the content that is valued most highly by UK viewers is programmes made specifically for UK audiences, which is what UK PSBs spend their content budgets on;[12] and

(c)         investment in original content by the global OTT players constitutes an existential threat to the UK PSBs.

These propositions cannot be simultaneously true.  If the first two are correct, then it follows that the last proposition cannot be correct: if the global OTTs are not investing in much content that UK audiences want to watch, then they cannot constitute an existential threat to the UK PSBs.

Of course, the reality is more nuanced than these types of assertions.  First, it is clearly the case that UK audiences like watching a wide range of programmes and movies, including much content that is produced in other countries.  This has always been the case.  Given the increasing breadth and quality of content being produced by OTT players, it should therefore come as no surprise that UK viewers are choosing to subscribe to their services and watch their content.  However, as with previous expansions in the availability of content produced outside the UK to UK viewers, it would be nonsensical to take the view that there is a prospect of such viewing substantially or entirely displacing viewing of ‘homegrown’ content.

Ironically, given the proven strength of OTT players’ ability to invest in high quality content, the key change that would potentially give rise to an enormous threat to UK PSBs – particularly the commercial PSBs – would be if the OTT players began investing in UK focused content at scale.

3.7              The PSBs have the capacity to successfully adapt as the market evolves

The PSBs have a number of key assets and advantages that have enabled them successfully to meet the challenge of increased competition for viewing in the past and remain central to their ability to do so going forward.

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3.1       

3.2       

3.3       

3.4       

3.5       

3.6       

3.7       

3.7.1         A focus on UK content

Put simply, programmes produced by the UK public service broadcasters are attractive to UK viewers and are watched by millions every day, and there is no reason to believe that this will change in the foreseeable future.  As Ofcom has found, UK viewers have a strong preference for watching content delivered by the PSBs.[13]

Whilst there is much imported content available to UK viewers, the most watched and appreciated programmes remain UK originated.  As Anne Bulford, Deputy Director-General of the BBC, recently stated:[14]

By contrast, to date, the content provided by operators like Netflix and Amazon is developed principally with US audiences in mind and/or that would appeal to a broad international audience.

While some global operators have signalled that they will seek produce a greater amount of locally targeted content, the amount of spending by new entrants on content specifically developed for the UK market is likely to remain small relative to the spending of PSBs.

3.7.2         Universal free availability

The PSBs’ services are available for free in nearly all UK households.  By contrast the maximum reach of pay TV channels is roughly half of UK households.  Netflix is regarded as being hugely successful in the UK in growing its subscriber base.  Yet it has less than a third of the reach of PSB channels. 

Reach has a significant role to play in the economics of provision of television services, including in relation to investing in content and revenue generation for commercial services.  It also contributes significantly to operators’ ability to promote their own services, for example by directing viewers to other programmes across their portfolio, and to other services, such as their online ‘player’ services.  The enormous advantages held by the PSBs in this context, derived from their free availability to almost all homes in the UK, cannot be underestimated.

3.7.3         Production of high quality content in a broad range of genres

The PSBs have a deep expertise in producing high quality content in a broad range of genres, including key staples of the broadcast schedule such as news and current affairs, sport, light entertainment (game shows, panel shows etc.), soaps, kids, comedy and documentaries.  By contrast, the new entrants to the sector have focused their content investment.

3.7.4         Strong brands and legacy

The PSBs are among the UK’s most recognised and trusted brands.  In the case of the BBC this in part stems from its unique non-commercial nature.  More generally public awareness of the PSBs, and what they stand for, stems from the fact that they have been engaging with UK audiences via television – which occupies a significant role in most peoples’ lives – for over fifty years.

3.7.5         A high degree of adaptability

The PSBs have a demonstrated track record in adapting to change.  For example, with the advent of digital television broadcasting in the UK the PSBs quickly developed portfolios of TV channels to reduce the impact of channel proliferation on their viewing shares.  Similarly, the PSBs have all successfully delivered internet-based ‘player’ services, notably led by the BBC’s iPlayer, which are available via a wide range of devices.

3.7.6         Significant regulatory advantages

The PSBs receive a range of benefits derived from their special status in the UK broadcasting ecology including licence fee funding (in the case of the BBC), free terrestrial broadcasting spectrum, and prominent positions on traditional EPGs (which continue to be the method via which most viewing is accessed).  In principle, these benefits are balanced by PSB obligations.  In recent years, however, the obligations faced by ITV and Channel 5 in particular have been reduced significantly.

Taken together, these factors place the PSBs in an extremely strong position to be able to react to the arrival of new competitors in the UK content sector.

3.8              The challenge of younger demographics

The one area of the market that has seen a major shift is in relation to the viewing behaviour of young people, which has diverged significantly from that of older demographics.  In particular, engagement with scheduled, long-form television is now far lower among younger demographics than older groups, and short form content, both professional and semi-professional, principally watched via YouTube, plays a far greater role in their consumption of audiovisual content.  Daily average TV viewing among under 35s fell by 13% in 2017, and among both children and people aged 16-24 has fallen by over 40% since 2010.[15]

One hypothesis is that over time these age cohorts will come to resemble older demographics.  As a recent Mediatique report for the BBC puts it: it is “unlikely to be the case (when careers and children intervene)” that “younger age groups take their current consumption patterns with them unchanged into later life”.

Whether this hypothesis holds true or not, it is probably the case that PSBs (and indeed all broadcasters) will need to find new ways to make their output and services appealing to young people.  We discuss this in more detail in Section 5.

3.9              Public policy goals are well served by a competitive market that delivers competition and investment in British content

It is useful to remember that greater levels of competition are, in general, considered a positive outcome in markets, likely to deliver benefits to consumers via innovation, improved efficiency and prompting firms to find better ways to serve consumers.  There is no obvious reason why competition in the UK content sector should be viewed any differently – particularly when it continues to drive investment in original British content, a clear public policy objective.

We consider that the competition provided by rival new entrant television services, including those that carry content financed by US companies, has created significant benefits for UK viewers over time, not only by providing them with a greater choice and diversity of content, but also by encouraging the UK PSBs, and other UK broadcasters, to raise their game.  There is no reason to suppose the arrival of Netflix and Amazon will be any different in this regard.

4.                   Sky’s role in the UK content sector

When evaluating the impact of new entrants into the UK context sector, there has been a tendency to focus debate on the relationship between the PSBs on the one hand and new global services on the other.  Other commercial players in the UK content sector are typically either not considered, or it is assumed that their interests fundamentally differ from those of the PSBs.

This approach, however, overlooks the role which established UK-focused providers such as Sky can play in sustaining the strength of the PSB system and UK content sector more widely.  While there has been some acknowledgement of the scope for new partnerships with Sky and others there seems to have been little analysis of the extent to which interests between the UK PSBs and other commercial players, such as Sky, are aligned and the associated strategic implications.

Sky and the PSBs share an interest in promoting a strong UK content ecology and investing to create dynamic UK-centric content services which attract the audiences that are fundamental to each of our models.  The extent of this shared interest has arguably been underplayed in discussions to date but should inform both policy decisions about the future of PSB, and broadcasters’ own future strategies.

4.1              The value of Sky to the PSBs

As a major UK platform operator, Sky helps to drive and reinforce PSB objectives and values in a number of critical ways.

Sky’s platform plays a key role in delivering critical mass audiences, helping drive advertising which funds commercial PSBs as well as being the primary method of access to BBC content for millions of licence fee payers.  Approximately one-third of TV viewing to the main PSB channels happens through the Sky platform.[16]  This is even more pronounced for commercial portfolio channels, which are of increasing importance in helping the PSBs maintain their overall share of viewing – around half of viewing to these services comes from audiences in Sky households.[17]  Sky also delivers substantial on-demand and catch-up audiences to the PSBs (8% of PSB viewing in Sky homes is recorded play back and 2% is catch up).[18] 

Sky delivers significant direct value to the PSBs through substantial commercial agreements to carry services beyond the core PSB offering.  These include Box Sets, HD channels and services to mobile and other devices.

Sky invests in a dynamic and evolving platform.  Our ongoing investment in technical and service innovation augments how consumers access PSB content.  The development of Sky Q and Sky’s pioneering use of HD, UHD, VOD catch up and box sets have improved the quality and range of the consumer experience.  Sky+ introduced recording options which now account for 17% of viewing; SkyQ has enhanced viewing with personalised recommendations; while Sky’s AdSmart technology allows broadcasters to address specific demographics with targeted advertising.

Sky’s platform places UK content at the heart of its proposition, and the PSBs in particular.  We know that our customers, like all audiences in the UK, place significant value on locally originated content that is relevant and authentic to them, leading to a strong commercial incentive to ensure that such programming is easily found and accessed.  This is why Sky has long given prominence to PSB content, not just in the linear TV guide, but in all areas of the user interface, including catch-up menus, where PSB on-demand content appears above Sky’s own programmes.

In summary, the Sky platform plays a key role in bringing PSB content to UK audiences and enabling the PSBs to sustain their economic models and deliver their remits.

4.2              Sky’s role as a broadcaster

As a broadcaster, Sky is one of a number of non-PSBs making a growing and substantial investment in UK production.  Collectively, multichannel broadcasters invested £1.1 billion in UK production in 2017, almost all (£965m) of which was on first-run originated content.[19]  Sky is by far the largest contributor, accounting for the majority of this investment figure.

Sky’s drive to increase investment in original British commissions was a direct reaction to the preferences of our customers.  It is clear that audiences value local, relevant and authentic stories, and that in an increasingly competitive marketplace Sky needs to continue to deliver this in order to maintain our position.  UK content is less readily available to acquire, and therefore necessitates direct investment in original production.

Currently, Sky has 70 shows in paid development, and will show a total of 38 original series in 2019, 21 of them returning shows.  While we are producing across eight separate genres, our investment has particularly focused on areas where we can provide high-quality, distinctive programming that is recognisably different from the PSBs’ offerings, namely drama and comedy.  At least one Sky Original drama is broadcast every month, along with eleven Sky Original comedies bring shown throughout the year.

Sky’s diverse genre delivery is also reflected in our ongoing commitment to news and current affairs broadcasting.  Unlike the PSBs, who have a requirement to provide news programming and are subsidised by the public purse, Sky News operates on a wholly commercial basis, making a vital contribution to media plurality.  The channel’s quality of coverage and editorial integrity have been frequently recognised, most recently with Sky News being named the News Channel of the Year by the Royal Television Society for a record-setting twelfth time.

Sky’s local content resonates strongly with our customers and is proving commercially successful too, with Sky Originals now delivering most of our top-rated shows.  In the UK, eight out of the top ten dramas in 17/18 were Originals, and they are also delivering viewing at scale, accounting for more than half of our 1m+ audience shows.  An increasing number of Sky’s shows have received critical acclaim and awards, most notably Patrick Melrose being nominated for five Emmy awards.

In summary, the multichannel sector, and Sky in particular, continues to produce an increasing range, quality and diversity of public service content without public subsidy or other forms of intervention.  This directly contributes to the good outcomes and level of choice that British audiences currently face.

5.                   Strategic and policy implications

A fact-based evaluation of the UK content sector, as outlined in the previous two sections, demonstrates that:

a)           audiences are as well served as they have ever been in terms of access to original UK content, thanks to the UK ‘s strong mixed ecology;

b)           the PSBs maintain a very strong market position, and there are good reasons to suppose that this will continue; and

c)            while competition from well-funded OTT players has undoubtedly emerged, the scale of this in terms of threat and impact is often overplayed.

Of course it remains the case that the PSBs (and indeed all broadcasters) will need to continue to adapt their approaches in order to reflect audience preferences, particularly if the evolving habits of younger demographics are seen to sustain as they reach the next age cohort.

As outlined, Sky does not consider that this evolution should cause the PSBs significant difficulties – as with previous market developments, they are likely to continue to thrive in the future UK content sector.  Indeed, the evolution of the market brings with it significant opportunities – such as the potential for collaboration with a diverse set of partners, or access to new global revenues – that the PSBs are well placed to take advantage of.

However, there is a danger that, rather than embrace these opportunities, the PSBs instead adopt approaches that risk damaging the wider UK content sector.

5.1              Broadcasters have the best chance of succeeding if they focus on content and collaboration

As highlighted, the key strength of the PSBs (and indeed other broadcasters such as Sky) relative to global competitors is their continued investment in and expertise in creating original UK content.  Continuing to produce high quality British programming, and making it as widely available as possible, is likely to be the most successful strategy to counter any competitive threat.

In particular, PSBs need to find new ways to make their output and services appealing to younger audiences.  This is an area where self-help on the part of the PSBs remains the most viable option for meeting this challenge.  Young people cannot be compelled or cajoled to watch more television in general, or public service broadcasting in particular, either by Government or regulators.  Nor will any amount of additional prominence on new or existing platforms draw young people to PSBs’ services; their lack of engagement is, emphatically, not an issue of being unable to find content.

As might be expected, the PSBs are already highly engaged with this issue.  For example, the BBC’s 2017/18 Annual Plan states:

“Our ambition to reinvent the BBC for a new generation is our biggest priority for next year.  Younger and older people’s consumption habits are increasingly different.  Younger people watch less television than older people.  They listen to less radio.  And where young audiences go now, older audiences will likely follow.  Online innovation has slowed the decline seen across all traditional media companies.  It has not reversed it.  If this trend continues, by the mid-2020s a significant minority of licence fee payers would no longer be a part of our shared national conversation, and might not be getting value to justify their licence fee either….  So every major part of the BBC will need to contribute to meeting this challenge.”[20]

In this context, and as Ofcom has observed, there are significant opportunities for the PSBs to effectively leverage their existing skills, knowledge and assets in partnership with each other and with larger players, something that they have been doing successfully for many years.[21]  Partnership has always had a significant role to play in the content sector, whether in relation to production or distribution of content.

Indeed, in recent years the BBC has been involved in a series of co-productions with Netflix, and Netflix executives have been publicly appreciative of the benefits of working with the BBC.  Meanwhile from a distribution perspective, the BBC has announced recent collaborations both with other PSBs (the much publicised Britbox service with ITV) and non-PSBs (agreeing to provide natural history shows, including new programming that will be jointly-developed, to a new global streaming service run by the Discovery Channel).

5.2              Sky can play an important role in the PSBs’ response

We believe that Sky has an important role to play in this context and can help sustain the PSB ecosystem into the future.  As noted, Sky’s role as a major UK television broadcaster means we have a strong commonality of interest with other television broadcasters, including the PSBs.  Consequently, our TV services have significant advantages for the PSBs over alternative distribution approaches.

For example, linear television channels remain at the heart of Sky’s platforms, in stark contrast to many OTT-delivered services.  Linear is still critical for PSBs in terms of reach, so Sky’s platform will continue to help the commercial PSBs to maintain an advertising price premium.

Sky also gives the PSBs a clear way forward even if audience consumption moves further towards on-demand:

a)           Sky’s local focus means that UK content, and therefore the PSBs, are central to our proposition even in an on-demand environment.  As noted, Sky already gives the PSBs’ catch-up services prominence above all other providers, and actively promotes PSB on-demand content through other ancillary routes (such as recommendations and featured pages); and

b)           Sky’s platform is also likely to provide greater options for monetisation of on-demand content, which will be crucial for the commercial PSBs if on-demand consumption continues to grow.  Possible opportunities include directly licensing content as part of commercial deals (as occurs currently), new methods of driving on-demand advertising revenue, and opportunities for greater audience insight through data sharing.

Beyond distribution agreements, Sky has a number of additional constructive relationships with the PSBs.  Our recent partnership with Channel 4 has helped bring new audiences to both our content and theirs, proving that innovative collaboration can bring mutual benefits.  Similarly, Sky’s recent deal with BBC Studios will enable millions of Sky and NOW TV users to access hundreds of hours of classic BBC comedy and drama, while at the same time delivering material revenue back to the BBC.

At Sky, our starting position is always that we want to work with broadcasters in the interest of viewers.  We would encourage PSBs to take advantage of the potential of further productive collaboration.

5.3              PSBs and policymakers should recognise these opportunities and aligned incentives

Sky’s concern, however, is that PSBs do no seize on these opportunities.  Instead, there is a risk that they pursue approaches that may damage the wider UK content sector.  These approaches include arguing for a set of regulatory interventions that would slow innovation and leave audiences without the choice they value, as well as pursuing restrictive distribution strategies that may harm the PSB ecosystem more generally.

5.4              Commercial incentives are already delivering on-demand prominence

The PSBs have been vocal in calling for an extension of the current prominence regime to an on-demand environment.  As the PSBs see it, competition from new content providers, new technology and changing viewing behaviour means that audiences are no longer able to find British shows.

The need to extend the current regime to new ways of finding and watching TV programmes should depend on good evidence that these new services are resulting – or are likely to result in future – in public service content becoming less discoverable, particularly on those platforms that are used by significant numbers of UK viewers.

At present, Sky is not aware of any evidence suggesting that the PSBs currently lack prominence in on-demand environments, or that it is difficult to find and watch PSB content.  On the contrary, all the available evidence points to public service content continuing to receive a high level of prominence, and to be readily discoverable, particularly on those platforms that are being used by significant numbers of UK viewers.

The reason for this is straightforward, and emphasised in the sections above: programmes produced by the UK public service broadcasters are attractive to UK viewers and are watched by millions every day, and there is no reason to believe that this will change in the foreseeable future.  As a result, any operator providing a new platform or TV service in the UK will want to ensure that its users are able easily to find and watch these programmes.  Commercial incentives drive platform providers to ensure that PSB content is easily discoverable, because that is what their users want. 

It is unsurprising, therefore, that the PSBs are consistently placed in prominent positions even when there is no legal or regulatory requirement to do so:

a)           The vast majority of UK households use platforms that include PSB catch-up content available from launch and place it in prominent positions in the user interface.  Almost 75% of UK households use one or more of the connected platforms of Freeview Play, Freesat, Sky+, SkyQ, Virgin Media and Youview.  As Ofcom acknowledges, these platforms make PSB content readily available and discoverable in a number of different ways.[22]

b)           Research for Sky[23] also demonstrates that an increasing number of newer platforms are including the PSB apps as standard.  NOW TV’s streaming stick, for example, has all PSB players at launch, BBC iPlayer now comes pre-loaded on a number of Smart TVs, while Apple TV incorporates services from the BBC, ITV and Channel 5 as standard.  This trend can be expected to increase given the popularity of PSB content.

Of course, it is important that this issue is kept under review, and we recognise that Ofcom has a duty to do so under the Digital Economy Act.  However, we consider that proposals for extension of the regime at this point in time are premature and not supported by evidence.

5.5              Any future prominence regime must be proportionate

Notwithstanding this, if policymakers nevertheless wish to intervene on this issue, it is crucial that any new regulation is applied in a reasonable, proportionate and non-discriminatory manner.  This is critical to support innovation, minimise competitive impact, and, above all, deliver in line with audience’s expectations.

A new prominence regime should not be limited only to ‘traditional’ platforms

If Government decides to extend the prominence regime beyond linear EPGs, it is critical that this extension is not limited to so-called ‘traditional’ platforms such as those of Freeview, Sky and Virgin Media, but instead covers the range of ways in which UK audiences are already accessing audiovisual content and may do in the future (such as smart TVs, app aggregators and so on).  Any other approach would clearly harm competition, damaging established platform providers that invest significantly in jobs and innovation in the UK. 

Differentiated regulation would also risk harming the PSBs themselves in the longer term, as it could mean that viewers are attracted away from UK-based platforms to unregulated spaces.  These are likely to have significantly less focus on both linear content and programmes produced for the UK market, with fewer guarantees that public service content (such as news) will feature as prominently.

A new prominence regime would need to operate in line with the existing PSB compact

Extending the prominence regime would grant additional benefits to broadcasters holding PSB status, and represent a clear transfer of value from commercial broadcasters and/or platforms to the PSBs.  As such, Government could only reform the regime following a review of the existing PSB compact to ensure an appropriate balance of obligations and compensation.

In particular, it would be necessary to introduce corresponding ‘must offer’ obligations for any PSB on-demand content that benefits from any new prominence regulation.

At present, since the commercial PSBs’ on-demand offerings are not public services and therefore are not subject to must offer and prominence regulation, they are instead important discussion points in negotiations between platforms and public service broadcasters.

This has provided the commercial PSBs with opportunities to exploit their catch-up content commercially, either for a specific value or as a trade-off against other points of negotiation.  But it has also meant that some of the PSBs’ on-demand offerings have been slow to become available on a widespread basis – or in some instances, not become available on certain platforms at all.

This illustrates why it would be necessary to introduce a must offer obligation for any content that newly benefited from prominence regulation – platforms are only able to give prominence to content if they are provided with that content in the first place.  This is already the case for linear prominence, with every public service channel subject to a must offer requirement for networks and satellite services.

A new prominence regime must be clearly focused on PSB content

The BBC is the only public broadcaster for whom all of its channels and services have PSB status.  All the other PSB players contain a mixture of PSB content and content which was commissioned/acquired for their non-PSB channels.

Moreover, content that has never been shown on a PSB channel is frequently granted much greater prominence within PSB catch-up services than pure PSB content.  Indeed, there is no sign of regional and local news on-demand on the ITV Hub at all, while the national news is buried way behind non-PSB content like Love Island and Celebrity Juice.

For this reason, any new regulation should be directly related to PSB content, rather than the PSBs’ specific catch-up players (such as ITV Hub).  This also reflects the fact that platforms have a variety of different ways of incorporating PSB on-demand content into their proposition, some of which are not based on the PSBs’ player apps at all.

5.6              PSBs should look to distribute their content as widely as possible

From a distribution perspective, it appears that the PSBs’ main response to the arrival of new competitors such as Netflix has been to attempt to directly replicate an on-demand-centric approach by developing their catch-up players.  For example, the BBC is proposing to make potentially significant changes to BBC iPlayer, which the BBC has itself characterised as a ‘transformation’ of the service “from primarily a catch-up and linear TV service to a destination for our audiences”.

While catch-up services do and will play a significant role in the PSBs’ offerings, Sky is concerned that a narrow-sighted approach to distribution – i.e.  one which focuses entirely on app-based on-demand players – risks damaging both audiences and the UK content sector as a whole. 

Sky has direct experience of how the BBC’s “iPlayer only” strategy can be detrimental to audiences.  The BBC has not granted Sky permission to include its linear channels or its catch-up programming in the Sky Go and Sky Q mobile apps, preferring instead to make BBC programmes only available on these devices through iPlayer.  This means millions of licence fee payers who are Sky customers are unable to access content they have funded in a way which is convenient to them.  Beyond harming audiences, this also runs counter to the BBC’s own obligations, by reducing the reach and value that its programming delivers, with the consequence that BBC content may be viewed less.

The danger going forward is that PSBs pursuing ‘walled garden’ approaches via individual apps will silo viewers in single-broadcaster environments, eliminating the benefits of audiences being able to move easily between a variety of UK content sources.

In the linear environment, the benefits of ‘overspill’ are obvious.  With PSBs placed prominently together at the top of the EPG, it is easy for viewers to move between different broadcasters, increasing reach (and ultimately revenue) and allowing for a sustainable mixed ecology.

In contrast, the reach of an individual PSB depends on proactive viewer use of their app, which in turn depends in large part on promotional muscle and brand strength.  Once audiences have accessed a particular app, they may have a greater tendency tend to stay within that environment rather than move away to other services.  If this happens, smaller PSBs (and indeed non-PSBs) are likely to experience a marked reduction in audiences.

This risk is best demonstrated by the relative share of the BBC and ITV in different environments.  During 2018, in a linear environment, the BBC received around one and a half times the amount of viewing that ITV does.  In contrast, the iPlayer is viewed four times as much as ITV Hub.[24]  While several factors may underpin this variance, the fact that it is significantly harder for audiences to move from iPlayer to ITV Hub than it is from BBC One to ITV1 would appear relevant. 

Sky believes that viewers should be able to watch what they want, how they want, with platforms free to innovate.  We consider that PSBs should be working with platforms to make this possible, making popular content more accessible, rather than seeking to restrict it.  In tandem, policymakers should prioritise measures that would benefit all contributors to the UK content sector, avoiding regulation that would restrict the innovation of platforms which are vital to the PSBs’ sustained success in a globalised marketplace.

April 2019