Regulator cranks up pressure on Sky

Sky's battle with UK regulators reached boiling point yesterday as Ofcom warned that the pay-TV giant's plans to launch subscription services on the Freeview platform could harm consumer choice.

The regulator's decision to launch a 10-week consultation into Sky's plans to launch its Picnic service on Freeview comes only two days after the Competition Commission's ruling that the company's investment in a majority stake in ITV was anti-competitive. The broadcaster has been at the centre of a series of regulatory investigations over the past year and, as a result, has become embroiled in a war of words with the watchdogs.

The latest spat relates to concerns that Sky's dominance of the pay-TV market and ownership of exclusive rights to premium content such as Premier League football games and shows such as Lost and Prison Break could stifle competition from smaller rivals which will struggle to compete with the Rupert Murdoch-controlled company.

One source said that Sky's plan to launch subscription channels – including Sky Sports and Sky One – via rooftop aerials was a serious concern for its smaller rivals given its enormous marketing and financial muscle. "It's like a Tesco opening next to a corner shop," he said.

Sky argues that consumers should be allowed to choose who will win and lose in the pay-TV market and that the launch of Picnic will increase consumer choice. Its hand is strengthened by the fact that Top Up TV has offered pay-TV channels such as Nickelodeon and The Discovery Channel over Freeview since 2005, while Setanta launched its own service in the summer.

Mike Darcey, Sky's chief operating officer, has previously attacked its competitors for opposing the company's plans, describing Virgin Media, BT, Top Up TV and Setanta as the "gang of four" looking to Ofcom to protect them from competition.

Ofcom may block Sky's plans to launch Picnic early next year or it could force the pay-TV company to wholesale its premium content so that its rivals can compete toe-to-toe against their much larger rival.

Ofcom said in a statement: "If, as a result of Sky's position in the wholesale provision of sports and movies channels, Sky were to emerge as the main retailer of pay-TV services not only on the satellite platform but also on digital television, other providers of pay-TV services may find it more difficult to enter the market. This may not be in the long-term interest of consumers."

A Sky spokesman said the launch of Picnic would increase competition on the Freeview platform and it will consult the regulator over the coming weeks. He said: "The only thing that's guaranteed in this process is BT and Virgin Media will do everything they can to stop Picnic. Their commercial self-interest should not be allowed to stand in the way of a new service that will bring more choice to customers and increased competition to the marketplace."

Sky's competitors differed. Neil Berkett, the head of Virgin Media, said: "The industry and consumers alike should be ext-remely concerned by any ren-ewed attempt by Sky to exploit its control of key content to undermine other digital-TV operators and further tighten its grip on the UK's pay-TV market. It's not only appropriate but crucial that Sky's plans receive rigorous scrutiny from the regulator."

David Chance, the head of Top Up TV and a former Sky exec-utive, said: "We all want these channels on the Freeview platform. However, if Sky is the sole retailer of those channels, it will prevent retail competition."

Another issue for Ofcom to consider is that Sky is using a different technical standard to offer pay-TV over Freeview that is incompatible with its rivals' systems. It has argued that it is up to set-top-box manufacturers to develop interoperable devices.

Sky is also going head-to-head with Ofcom amidst the regulator's wider investigation into the competitiveness of the UK's pay-TV market, in which the company controls an 80 per cent share.