Ofcom sparks Herbies vs Ashurst battle in case where Sky’s the limit

There is a battle looming over the future of satellite television. It is one that pits one of the world’s largest media companies against its rivals and a determined regulator.

And it is one where legal ­arguments are likely to decide how we watch paid-for television ­channels in the future.

Ofcom’s recent report into access to BSkyB’s sport and movie channels has competition lawyers salivating. The regulator has ­proposed forcing Sky to lower the prices it charges rival broadcasters to air its premium channels - a move that brought a swift and decisive response from the ­company.

“We disagree fundamentally with Ofcom’s approach, analysis and conclusions,” said Sky in a statement. “In light of Ofcom’s determination to pursue its preferred outcome, we will use all available legal avenues to challenge this unwarranted intervention.”

Such fighting talk is typical of Sky, which has found itself a ­regular target of the competition authorities. The company has already instructed its law firm of choice - Herbert Smith - on the issue. Head of EU/competition Elizabeth McKnight is working closely with Sky general counsel James Conyers.

But with more than 600 pages of the Ofcom report to plough through, it might be a while before there is a detailed response.

The argument centres around how much Sky makes the likes of Virgin and BT pay to air its sports and film channels.

Sky’s rivals say the cost is too high and consumers are the ones paying the price - it is believed that Virgin makes a loss on the content it buys from the group.

But Sky argues that it has invested heavily in creating the channels and should be able to reap the rewards.

Virgin is being represented by Ashurst partner Duncan Liddell over the Ofcom inquiry, while the other broadcasters involved in the original complaint against Sky, BT and Top Up TV, are understood to be using in-house lawyers.

It is not the first time Ashurst and Herbert Smith have faced off on behalf of their respective clients.

Both have advised Virgin and Sky for many years, in Herbert Smith’s case since the early 1990s. Last year, the two firms were on opposite sides of the table in the bitter dispute over the fee for Sky’s basic channels, a row that led to Virgin viewers losing Sky One, Sky Travel, Sky News and Sky Sports News for more than a year.

The final result of that battle is best described as a draw: both companies agreed to terminate all High Court proceedings against each other last November and the basic channels are now back on Virgin at an undisclosed rate.

But the dispute gives added spice to the Ofcom inquiry, as does the collapse of sports broadcaster Setanta in June. Setanta, which was advised by Denton Wilde Sapte, had been one of the original complainants to Ofcom in 2007 when the regulator began its ­investigation into Sky’s paid-for channels. Its demise raises ­difficult questions about the ability of other broadcasters to compete with the Sky behemoth.

So what next for the Ofcom ­consultation? Major legal action is unlikely until the regulator ­finishes its review. According to those close to the situation, the ­latest document is the third it has produced on the subject, but no one appears to know when the definitive report will be ­published.

In the meantime, Sky, Virgin and the rest have until 18 ­September to respond to the latest document.

If Ofcom follows through with its threat and forces Sky to lower its rates, it looks likely that the company will fight the decision at the Competition Appeals ­Tribunal. If any of the complainants are unhappy, they can also appeal, in what looks set to be another tense legal showdown.

However, according to ­insiders, even if the dispute goes to appeal, Sky could still be forced to drop its fees while the case is being heard. One competition partner said Ofcom’s measures could only be delayed if there was irreparable damage to the business. And Ofcom thinks that ­lowering prices will actually increase Sky’s revenues from its premium channels due to an increased number of subscribers.

In short, Sky could be facing an unwelcome intervention to a core part of its business, with no ­possible recourse until the end of a lengthy legal battle.

There are other issues as well. Ofcom is looking into Sky’s arrangement with Hollywood ­studios over its video-on-demand service, and is considering ­referring the matter to the ­Competition Commission. There are also concerns about the next auction of Premier League rights in 2012 now that Setanta is
no more.

“They all have tough jobs,” says Martin Coleman, head of competition at Norton Rose. “Ofcom has got to establish whether it’s appropriate to act and try to make its ­decisions as review-proof as ­possible. Sky is facing aggressive customers and competitors, and a regulator that’s determined to do something. Virgin and BT have got to persuade a regulator to act in circumstances where Ofcom has to interfere ­significantly with the rights Sky would normally have.”

In the battleground of ­competition law, disputes between regulators and dominant ­companies often go down to the wire. This one looks set to be a classic.