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TIE ME KANGAROO DOWN, SPORT: WHY THE UK VIDEO-ON-DEMAND JOINT PLATFORM WAS BLOCKED

APRIL 2009

On 4 February 2009, the UK Competition Commission (“CC”) issued its final report into the joint venture known as Project Kangaroo, following a 32-week extended inquiry.

The CC has blocked the proposed joint video-on-demand (“VOD”) platform, on the basis that it is likely to result in a substantial lessening of competition in the supply of UK TV VOD content at both the wholesale and retail levels. However, the CC did not consider that the JV was likely to result in a SLC in the online advertising market or in the market for content acquisition in the UK.

What was Project Kangaroo?

In November 2007, the BBC (through its commercial arm, BBC Worldwide), Channel 4, and ITV agreed to form a limited liability partnership (called UKVOD LLP – “UKVOD”)), which was owned equally and would supply VOD content to any consumer with a personal computer in the UK, and to third party VOD retailers in the UK.

What is VOD?

VOD covers a range of technologies which allow consumers to select audiovisual content for immediate or subsequent viewing, rather than being restricted to the ‘linear’ TV schedule put together by broadcasters.
VOD services include free-to-air advertising funded models, subscription services and pay-per-view services. Viewers can access content over the Internet without subscription (typically referred to as (“open VOD” e.g. iTunes, Joost, Zatoo and Babelgum) or in a variety of ways with a subscription or using dedicated hardware or connections (“closed VOD” e.g. Virgin Media, Sky Player, BT Vision and Tiscali). VOD systems may “stream” content through a set-top box, allowing viewing in real time. Alternatively, content is downloaded to a device such as a computer for viewing at any time – either as a time limited file (download to rent, or “DTR”) or permanently (download to own, or “DTO”).

What VOD content was covered by the Kangaroo agreement?

Subject to specified exemptions, UKVOD was to be the parties’ principal route to market for their archive VOD. BBC Worldwide did not already have its own retail VOD presence in the UK market. However, Channel 4 had been the first of the parties to launch its own VOD service over cable and broadband (“4OD”) and also offered catch-up for Channel 4 programming through Channel 4.com. ITV also had consumer-facing VOD operations, with its 30-day catch up and archive material offered on a streamed basis over the Internet via ITV.com. Furthermore, at the wholesale level, all three parties licensed content to a variety of third party VOD services.

Each party agreed to make available a minimum number of hours of content to UKVOD for a minimum period including, for Channel 4 and ITV, both archive and catch-up VOD rights. ITV.com and Channel4.com would each continue to provide catch-up content separately, focusing on content that complemented their primary broadcasting businesses. Channel 4’s 4OD service would cease. The BBC’s iPlayer, as a public service operated separately from the commercial activities of BBC Worldwide, was not part of Project Kangaroo.

What was UKVOD’s role to be?

UKVOD was to select content from ITV and Channel 4. The initial selection of BBC content would be made by BBC Worldwide. UKVOD would then be able to syndicate the whole, or substantially the whole, UKVOD service to ‘closed’ VOD services. After allowing 12 months to establish the UKVOD website, it would supply ‘open’ VOD services also. This ability would be largely exclusive to UKVOD for archive VOD content but ITV and Channel 4 would retain the ability to grant rights to catch-up content to third party VOD providers separately.

What was the rationale behind Kangaroo?

The parties hoped to create a customer proposition that could compete in the VOD market against powerful competitors, who were able to leverage existing assets that the broadcasters did not have e.g. Sky, BT, iTunes. They intended to create a ‘one-stop shop’ that would provide consumers with the convenience of being able to access popular content and niche content on a single service, providing the consumer with a ‘sophisticated and comprehensive user experience’. The parties said that they were also seeking to maintain control of their content in order to avoid the ‘disintermediation’ faced by music companies due to the success of e.g. iTunes. Finally, they hoped to limit individual risk in an uncertain, nascent, VOD sector.e-Privacy Directive could yet result in a widespread mandatory notification scheme being introduced into UK laws.

What were the competition concerns?

Retail level

The CC first looked at the level of competition for consumer-facing UK VOD services. It found that, absent the JV, the parties were, or would be in future, each other’s closest competitors. Third party retailers offered a weaker competitive constraint and relied on content from one or more of the parties to offer any substantial volume of UK TV VOD content to their customers. The parties therefore had a substantial share of VOD content, particularly of UK TV archive. Furthermore, as non-UK content did not act as a good substitute, non-UK retailers did not represent effective competition to the parties.

The CC concluded that the JV was likely to result in a loss of rivalry at the retail level. This would enable the parties to offer less attractive terms to customers, resulting in viewers paying higher prices for some content, paying for a higher proportion of content (i.e. less free-to-air content), and/or receiving lower quality or less innovative offers. The loss of rivalry and the concentration of content in one entity could also reduce the opportunities for future initiatives or developments by third parties of alternatives to the JV.

Wholesale level

The Commission then examined the market for the wholesale licensing of content for VOD exploitation, looking at the syndication deals between the parties and third-party VOD retailers as customers. In general, the parties had greater bargaining strength than the VOD retailers, although there was some evidence of VOD retailers playing one party off against another. There were no sources of sufficient scale to provide credible alternatives to the parties’ content, making it difficult for third party VOD providers to switch, or threaten to switch, if they were unable to agree satisfactory terms. It was also important for VOD retailers to be able to offer both catch-up and archive content. These factors all indicated that the parties already had a strong position in the wholesale market.

The CC then considered the impact of the JV, which it found would lead to a loss of rivalry on the wholesale market as the parties were each other’s closest competitors. Third party producers offered only a small fraction of the VOD content available from the parties, and so the CC thought it unlikely that third party VOD retailers would be able to acquire sufficient UK content to offer an effective competitive constraint to the parties. Furthermore, the CC was concerned that ITV and Channel 4 would have less incentive to syndicate catch-up content to third party VOD retailers not supplied by UKVOD, as this could undermine the success of UKVOD.

Finally, the CC was particularly concerned that the interaction between the parties could facilitate tacit collusion and enable ITV and Channel 4 to align their syndication strategies to UKVOD’s. The CC thought that, even if they did enter into syndication deals with third parties, these would be on less favourable terms than would otherwise be the case.
As a result, consumers could be worse off because any price increases, or adverse changes in terms, might be passed on to them. Also, the parties might seek to foreclose access to content or otherwise increase the costs of competing VOD retailers, or limit the manner in which the content could be exploited.

What test did the CC apply when considering Kangaroo?

Under the merger regime in the Enterprise Act 2002, once the Office of Fair Trading has referred a merger to the CC for an in-depth investigation, the CC must (i) decide whether or not there is a substantial lessening of competition (“SLC”) as a result of the merger and (ii) if there is an anti-competitive outcome, also decide how to address the competition concerns by reaching a decision on suitable remedies. In considering remedies, the CC is required to take into account the need to achieve “as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it”. The remedies must also be proportionate to the SLC and the adverse effects identified.

What remedies did the CC explore?

The CC explored various alternatives to outright prohibition, including putting in place access remedies to control the way that content is offered to other providers and/or making material modifications to the terms of the JV. In addition, the parties suggested other measures, such as a proposal to remove the JV’s ability to wholesale content, combined with measures to prevent the exchange of commercially sensitive information. However, the CC was not convinced that these would overcome the risk that membership of this JV would influence the parties’ commercial decisions, particularly in relation to the wholesaling of VOD content. The CC therefore decided that prohibition was the only remedy that would address its concerns. Each party would then pursue its own commercial interests, either alone or in partnership with a third party to exploit its archive VOD content rights, which in turn would result in benefits to customers.

What is going to happen now?

It is likely that each party’s existing VOD services will continue for the time being, and they will each continue to wholesale their content to third party VOD retailers separately. They may also find other ways to work together; the BBC has previously hinted at the possibility of sharing its iPlayer technology with the likes of ITV and Channel 4, and has also suggested a partnership with BT and ITV to explore ways of developing a common standard for delivering programmes to TV sets via the internet. In terms of VOD, consumers will still want to access the same content. However, without Kangaroo, it looks as though they will still have to go to different sites and download multiple players in order to get it for the foreseeable future. In the meantime, general public commentaries about the project suggested that an estimated £25 million of investment has already been sunk into it, including in the development of the joint technology platform. Earlier this week, Orange confirmed that it may buy the technology behind Kangaroo, which would enable it to enhance its Orange TV broadband service across Europe. It is likely that other companies are also hoping to buy some of the Kangaroo assets. Where this will end up may spark a new round of positioning in the race for share of the UK VOD market.

Susannah Sheppard and Rachel Iley