Latest insight on Kangaroo decision from Screen Digest's Broadband Media Team
By Dan Cryan, Senior Analyst Broadband Media and Arash Amel, Head of Broadband Media
London 4th December 2008: The Competition Commission has provisionally ruled that Project Kangaroo (the joint venture between BBC Worldwide ITV and Channel 4) is likely to result in a substantial lessening of competition in some aspects of the UK video on demand (VoD) market. Specifically the Commission concluded that Kangaroo would result in a loss of competitiveness at a wholesale and retail level (covering download to own (DTO) and digital rental (DR) services), but that that the JV would have little effect on either the UK online advertising market or content acquisition space.
The provisional findings prohibit Kangaroo from offering TV content on a paid basis or being used as a one-stop shop for wholesaling content to other online TV services in the UK. The Commission reasoned that as the partners in the JV control much of the TV content production in the UK and that UK-produced content is important for the success of any online TV service, third party services would not to be able to compete with Kangaroo effectively on paid content. Moreover such would be the JV's market power that third parties have little choice but to accept the terms offered by Kangaroo for acquiring content on a wholesale basis. The Commission has invited interested parties to submit views on potential remedies, which include making content available on a non-preferential basis by 16th December 2008. A final decision is expected next year.
Screen Digest's Take:
Screen Digest believes that the Competition Commission has ignored a number of important factors that determine how the online content and TV production markets work, and that as a result the ruling potentially allows the BBC, ITV and Channel 4 to perpetuate anti-competitive behaviour. We propose to tackle these issues in order:
Online Content
The ruling leads us to believe that the commission has misunderstood where the power lies in online content distribution both paid and free to view (ad funded). In paid markets it has become clear that the device and not content is king. There is already a well established consumer behaviour where first consumers buy a device (e.g. an iPod or Xbox 360) and then start to buy content for that device. In practice what this means is that on the back of the iPod/iTunes ecosystem Apple is the leading digital content provider in the UK for music, movies and online TV.
The Cupertino-based company has a market share of over 90 per cent in the UK DTO TV market, over 70 per cent of the online music market and, along with Microsoft, controls 85 per cent of the online movies market. It is important to stress that no other device-based platform comes close to iTunes and that the only contenders likely to emerge in the short to medium term are likely to be Microsoft and Sony who have built an audience for their platforms using their core video game functionality as Trojan horse. Simply stated: Kangaroo is unlikely to be the most powerful platform for paid online TV because it does not control the leading devices or the platforms that go along with them.
Moreover, Apple and Microsoft have already established their online content businesses, not as major revenue generators in their own right but rather as value-added services designed to help promote their core business. In Apple's case this means using the possibility of buying content to encourage iPod, iPhone and Mac sales (the attach rate of ~30 songs bought per iPod sold worldwide suggests that actually buying content is less important to consumers than an attractive device and having the option to buy if they want it); in Microsoft's it means promoting the Xbox platform to facilitate game sales.
The result is twofold:
i.) the use of 'value-added economics' means the leading platforms are comparatively unconcerned by high wholesale prices charged by content owners because they are not invested in making money directly from their online services, and
ii.) the strength of their platforms means that their negotiating position is entrenched enough to resist heavy handed negotiation.
To put it another way: were the Kangaroo partners to withhold content from any of these platforms it would be the UK online TV market that would suffer and not these companies hardware sales.
However, where Kangaroo will have little sway on paid content, it has the potential to radically affect the online TV advertising market. Screen Digest is concerned that between ITV.com, Channel 4.com and Kangaroo's core site there will be little space left in the nascent online TV advertising market for the likes of Five, BSkyB and MTV. Again we believe the provisional findings suggest a lack of familiarity with online content markets.
In this case it's the small size of the online TV advertising market (0.9 per cent of all online advertising revenue in 2008) in relation to search (80.5 percent of online advertising revenue) which betrays the infancy of the online TV sector and the emerging nature of a format that ad buyers and sellers are still grappling with in a protracted effort to develop a mutually beneficial sales strategy. Any ad-funded Kangaroo platform (in conjunction with the partners' own services) is likely to mop up the vast majority of premium advertisers because it will dominate the monetisable online TV in the UK (YouTube and the BBC's iPlayer will continue to attract viewers but not ad spend). This has the potential to stunt the online TV market at a key time in its development as third parties are likely to find it hard, if not impossible to find advertisers willing and able to buy high CMP in-stream advertising in sufficient volumes to cover the costs incurred by many services.
Screen Digest believes that the online UK TV market is set to reach annual revenues of almost £190m in 2012 – less than 2 per cent of the total TV market. Of this 47 per cent is set to come from advertising, while the rest will come from paid content, notably DTO services serving hardware based platforms. What this picture does not reveal is the difference in consumption: free to view, ad-funded video is will make up over 95 percent of all content viewed. This is why it is imperative for the health and development of an emerging market that the advertising sector is not stifled by an anti-competitive Kangaroo.
TV Production
The effect of Kangaroo on TV production is less direct, it is after all not Kangaroo but rather its broadcaster owners that commission content, and in the case of the BBC the commissioning public service broadcaster is intentionally kept at arm's length from the commercial BBC Worldwide. However both in conversation and in the Competition Commission's ruling Screen Digest has detected distinct signs of scope-creep in the deals between the broadcasters and independent TV production companies; this is particularly true of Channel 4 and to a lesser extent ITV.
Initially the 2006 terms of trade between PACT (the UK trade body for independent TV producers) and the broadcasters typically limit the rights granted to broadcasters for on-demand use to a minimum of 'branded services' (and explicitly exclude all DTO use) – the incorporation into Kangaroo, with the heavy emphasis the JV has placed on DTO looks like an extension not intended by the initial terms of trade. It is an extension that the independent TV production companies can do little about because of the power that the three broadcasters exert over commissioning new shows in the UK.
This issue might be thought to lie outside the scope of a review of Kangaroo's effect on UK online TV competition since it is not a direct result of Kangaroo on the market, but rather the behaviour of Kangaroo's partners. But the reality is that they are indistinguishable in this case as the partners would not be blurring the lines on the terms of trade were it not for the prospect of a Kangaroo launch. Screen Digest suspects that this is a direct result of the fact that, since it was announced, the scope and ambition of Kangaroo has changed. Initially the service was intended as a way of monetising the broadcaster's archive and would have capitalised on content produced before 2004, to which the broadcasters own all the rights. However the submissions to the Commission revealed a project of far wider scope and ambition, so much so that it is unclear how the JV intends to position itself in the market. Given the breadth of this ambition it is unsurprising that Kangaroo's wings have been clipped as anti-competitive.
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