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Netflix and LoveFilm success holds the future for Sky’s movie monopoly

Can Netflix and LoveFilm break Sky’s TV movie monopoly? Media regulator Ofcom and major film studios disagree on a decision which could strike at the heart of the British TV business.

The Competition Commission is deciding whether it should intervene in Sky’s exclusive deals with Hollywood studios after a two-year investigation.

Its decision could see an end to Sky’s exclusive deals with the major players for films on Sky Movies – to the benefit of rivals such as Virgin Media, BT, TalkTalk, Netflix and LoveFilm.

GfK research for the Competition Commission

Sky’s clouded future

The latest round in the long-running investigation concerns Netflix and LoveFilm, who threw years of research into disarray by launching UK movie-streaming services around Christmas.

The Competition Commission surveyed Netflix and LoveFilm users with pay-TV to see if they would drop their subscription in favour of the new kids.

In the end, 15 per cent said they already had or were likely to change their pay-TV subscriptions, after using a streaming movie service. Many Netflix and LoveFilm users were also heavily influenced by their free trial offers, which were still in operation during the survey.

Ofcom believes this means that Netflix and LoveFilm haven’t changed the industry – it was Ofcom’s three-year inquiry into British pay-TV which lead to the Competition Commission’s investigation.

Ofcom, with support from Virgin and BT Vision, decided that Sky’s ability to win exclusive deals for Sky Movies was giving it too much power over its rivals.

The UK offices of Paramount Pictures, Warner Bros and Universal Studios claim the new services have proved there’s no need for state intervention.

Ofcom’s argument

Ofcom said that the launch of Netflix and LoveFilm has to be set in context against the recent failure of services like Fetch TV and SeeSaw.

“We consider that recent market developments associated with Netflix and Lovefilm should be viewed in context and that their potential market impact should not be overestimated.

“The underlying competition issue, of access to premium content, remains a fundamental concern.

“On the evidence presented by the Competition Commission, it is far from clear that the nascent offerings from LoveFilm and Netflix have changed the nature of the competition facing Sky’s movie offering.

“It is also unclear whether they have the potential in future to address the adverse effect on competition and the resulting detriment to consumers identified by the Competition Commission.

“LoveFilm and Netflix clearly have ambitions in the pay TV retail market, but their ability to compete directly with Sky on a sustainable basis is not certain and critically dependent on access to compelling content which is currently controlled by Sky and likely to remain so.”

Hollywood strikes back

Subscription rates for Sky Movies have been stagnant for several years, which has made it hard for the Hollywood studios to push up the rate they charge Sky.

The crucial topic is Sky’s exclusive access to the ‘First Subscription Pay TV Window’ – the period when they can first be shown on TV after the Box Office-style rental services.

They stand to win if they can force Sky into a bidding war with Netflix and the Amazon-backed LoveFilm for exclusive access – but they’ll lose if the Competition Commission decides exclusive deals are bad for viewers.

Alternatively, Sky could be forced to sell the Sky Movies channels wholesale at a fixed rate as they do with the Sky Sports channels.

Even Sky has its own ‘over-the-top’ internet-based film and TV service, Now TV, which will launch this summer.

Warner Bros Entertainment UK said: “We consider that the Lovefilm, Netflix and (in the future) Sky over-the-top services are substitutes for the current Sky Movies service.

“These services contain the same type of movie content as Sky Movies, including (in particular) First Subscription Pay TV Window movies together with a range of library content.

“The same providers compete for the rights to that content; indeed, Lovefilm and Netflix have invested heavily in order to be able to offer attractive movie propositions to consumers on a lasting basis.

“Sky has already been outbid by Netflix for MGM’s rights in the UK, and Lovefilm and Netflix have successfully acquired one or more Major Studios’ First Subscription Pay TV Window rights in other territories, which (together with public statements by their representatives) indicates a willingness and ability on their part to invest in bidding for those rights in the UK.”

Paramount Pictures Corporation said: “Standalone service providers do not require access to Sky’s platform or content in order to be able to bid for First Subscription Pay TV Window rights and provide innovative on-demand subscription movie services direct to consumers’ TVs.”

NBC Universal (Universal Studios) said: “NBCUniversal considers that the adoption of remedies would be entirely unwarranted and inappropriate at a time of increasing and effective competition in the sector. 

“This is a particularly dangerous course to follow in a fast moving sector where technological developments are opening up new competing methods of delivery.

“Netflix is forging ahead and its CEO has publicly stated that regulatory intervention is not currently welcomed whereas traditional pay TV retailers appear to have been biding their time in the hope of gaining some advantage from the present investigation.

“In short, the Commission must be careful to avoid its actions artificially distorting the market at a time in which older technologies and commercial models face competition from new methods of delivery and innovation.”

UPDATE 23/05/12: Competition Commission’s new provisional ruling says Sky no longer has films monopoly and no further action required.