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Sky tries to double price of under–performing basic channels

As Virgin Media builds market leading portfolio of programming, Sky tries to stifle competition by engineering withdrawal of basic channels from competitor's service

Since its launch on February 8th, Virgin Media (NASDAQ: VMED) has announced plans to enhance dramatically its digital TV service with a combination of new programming and cutting edge, on demand technology. As a result, in addition to over 100 traditional broadcast channels, its digital TV customers now have access to over 2,700 hours of on demand programming, including a huge range of hit TV shows and highlights from the previous week's broadcast schedules. Recent content deals with the leading studios for major hit shows such as West Wing, CSI, The OC, Nip/Tuck, together with our competitively priced packages incorporating Sky Sports and Movies and the launch of Virgin Central, means that Virgin Media more than matches any content available to customers in the pay–TV market. Our aim is to build on our leading position and double our offering to 6000 hours of on demand content over the coming months.

This expansion has coincided with negotiations to renew the contract for carriage of Sky's basic channels – including Sky One, Sky Two, Sky Three, Sky News and Sky Sports News – across Virgin Media's network.

However, following an intensive series of meetings over the last week, we now anticipate a withdrawal of these channels by Sky at the end of February. The nature of these negotiations leads us to believe that this outcome has been deliberately engineered by Sky in order to suppress competition and coerce Virgin Media's customers into switching to its service by denying them access to the basic channels. (These negotiations do not impact Sky's premium sports and movies channels which will continue to be available to Virgin Media customers.)

This view is reinforced by Sky's decision to broadcast, at the height of negotiations on 12th February, a series of promotions claiming that the channels were about to disappear from Virgin Media's network. This was nothing more than a heavy–handed attempt to exert undue influence on the negotiating process.

Despite a dramatic and sustained decline in the basic channels' popularity in Virgin Media households (they have lost an average of 7 per cent of their cable viewing every year over the past four years) and the disappointing performance of some recent programming, Sky has consistently demanded a carriage fee more than double the existing arrangement. Virgin Media recognizes that the basic channels have been part of its TV line up for many years and has responded with a series of offers designed to ensure they remain so. Sky, however, continues to demand a price that bears no relation to the channels' popularity and is radically out of line with the way it values competitors' channels on its own network.

It remains Virgin Media's position that negotiations are ongoing and we continue to seek an agreement on terms that make commercial sense for both parties. However, as things stand, Sky's demands offer no prospect of us being able to reach a commercially viable agreement to continue carriage of these channels on Virgin Media's platform.

If Sky withdraws its channels, Virgin Media will divert any money saved into continuing the transformation of our TV service with an extensive range of new channels and programming. This will include further additions to our existing on demand library and ensure our TV service more than matches anything on offer from Sky.

For Sky meanwhile withdrawal will mean an estimated £45 million a year reduction in advertising revenues, over and above the subscription fees they will forego. Their willingness to do so speaks volumes about their desire to suppress meaningful competition.

This follows a largely–overlooked press statement by Sky on February 8th announcing plans to remove a number of free channels from the Freeview platform, depriving over 7 million Freeview viewers access to those channels. Sky indicated that it intends to use these Freeview slots to offer four subscription channels on terms that have not yet been announced.

Commenting on the anticipated withdrawal of Sky's basic channels, Steve Burch, President and CEO of Virgin Media said:

"Throughout its history, Virgin has challenged the attempts of dominant corporations to manipulate markets, stifle competition and dictate consumer choice. It has done so simply by giving consumers a better deal and Virgin Media is going to do the same.

"Sky's behaviour is a heavy handed and anti–competitive response to that challenge and consumer choice has been reduced as a result. I'm pleased, however, that at a time when they're taking content away, Virgin Media is giving people more."