Ofcom has Sky in its sights

The champagne corks were popping in west London in February, as BSkyB executives cheered their 20th year, a period of two decades which has seen a struggling satellite group become a broadcasting powerhouse. But yesterday, the bubbly went flat as Ofcom, the UK's media regulator, unveiled proposals that industry insiders said could break the group's domination of the pay TV market.

Ofcom said yesterday that Sky has "market power" over the wholesale supply of movies and sport, "and that it is acting on an incentive to limit the distribution of these channels to rival TV platforms". The implication is that by limiting those who can see this content, Sky can push up the cost to customers and rivals.

Under the watchdog's proposals, Sky would be obliged to sell its Premier League football programming and Hollywood blockbuster movies to any rivals that wanted it – potentially including BT, Virgin Media and Top-Up TV – at a reduced fee. Sky's average wholesale rate card is the equivalent of £20.72 for each viewer, but Ofcom is now consulting on regulating the price at between £14.55 and £18.35.

Jeremy Darroch, Sky's chief executive, was furious. "We want our premium channels to be widely available on other platforms," he said. "But we deserve a fair return on the investments which create so much value for other distributors and their customers. Forcing Sky to sell its channels for less than their true value is a subsidy for companies that have shown no appetite for investment in programmes."

Sky argues that Ofcom's involvement is "an unprecedented level of interference", particularly as the regulator has also unveiled a review of the 2012 auction of Premier League football rights to ensure it complies with competition law. It will also look at Sky's video-on-demand service, which could be separated from the subscription service.

Insiders at the regulator said the investigation was about "getting the best deal for UK television viewers". One said: "There's no doubt that the pay TV market is dominated by Sky over here".

However, Paul Richards, an analyst at Numis, said: "Penalising Sky is hideously unfair. It has committed to investing hugely at enormous risk and generated returns from that. No one gave Sky this position, it earned it."

Sky's rivals, first complained to the regulator two years ago. Gavin Patterson, chief executive of BT's retail business, said yesterday that the move was welcome. "It is clear from the demise of Setanta that the market is structurally flawed yet two and a half years have passed since this process began."

He added: "It is time for Ofcom to open the doors of the pay TV market and let in the fresh air of competition. Prices have been too high for too long but this could all change if Ofcom breaks Sky's stranglehold by creating a level playing field."

Rivals said Sky has bid up the rights on the Premier League so no new entrant can afford to challenge it. The group has also signed deals for exclusive rights with all of Hollywood's major movie studios.

Mr Darroch rejected the claims: "BT and Virgin Media do not deserve to be handed a reward at Sky's expense for their repeated failure to invest. It defies belief that Ofcom expects Sky to lower its wholesale prices to compensate for the higher costs of less efficient platforms."

Ofcom tried to avoid a bust up with Sky this month when chief executive Ed Richards said: "Sky has made an enormous contribution to the development of pay TV, in particular in the UK... it is not Ofcom's job to punish successful risk-taking". Though he added: "Nor do we want to see the development of further choice or innovation curtailed – that is now a potential concern."

The largest digital television platform in the UK is Freeview and it is used in more homes than Sky. "Availability of Sky Sports through a third-party on this platform is potentially the biggest threat to Sky's own subscription sports offer," analysts at Screen Digest said.

Wholesaling makes up 4 per cent of Sky's revenues with only Virgin Media and Tiscali TV offering Sky Sports' premium packages. Richard Broughton, a Screen Digest senior analyst, queried Ofcom's assertion it would earn more from increasing the practice. "It could force Sky to alter its own pricing packages as rivals will become more competitive. Putting Sky Sports over Freeview could be a game changer." Wholesaling also lowers the potential to sign up more lucrative direct subscribers.

"Sky's powerful position in the UK market has been hard-won and the lack of viable alternatives of scale can't be put down solely to Sky's control of sports and movie channels," Screen Digest said.

Sky-high: How it made it

*1989 Sky launches in the UK with just four channels, a handful of customers and several hundred staff. It merges with BSB the following year, and brings The Simpsons to Britain.

*1992 A year after launching its first dedicated sports channel, Sky wins exclusive rights to show the new FA Premier League. The company makes its first operating profit.

*1998 Sky Digital launches with 140 channels, the first digital TV service in the UK.

*2001 The company launches Sky+, which allows users to pause live TV. Subscriber numbers reach 5 million.

*2006 Broadband and home telephony service are introduced in the same year that Sky launches high definition television.

*2008 Sky is in more than one in three households. It demonstrates 3D television for the first time with standard HD box.

*2009 Sky announces 1,000 more jobs, with profits up 26 per cent to £388m at the half-year results.