BSkyB is the best run, most dynamic and most innovative media organization in the UK. It has transformed the economics of broadcasting. It has enabled scores of channels to launch and prosper, vastly enriched British sport, pioneered 24-hour news provision, raised technical standards throughout the industry and in many ways greatly expanded consumer choice.

However, it is also an extremely tough competitor, and treats regulators with as little regard as it treats commercial rivals. More than twenty years ago, its mantra was: we will strangle cable before cable strangles us. It has taken on the likes of the Office of Fair Trading, the Competition Commission and the broadcasting regulator, Ofcom, as each of them has tried to level up the playing field in pay television.

When Sky Television launched, it first did battle with British Satellite Broadcasting, or BSB. The resultant merger left the Rupert Murdoch-owned Sky in management control of what became British Sky Broadcasting, but nursing massive and continuing losses. Under Murdoch’s single-minded leadership, BSkyB easily out-manoeuvred what was then a fragmented and leaderless cable industry.

The major steps for Sky were its emergence from a basic four-channel offering (Sky One, Sky News, Sky Movies and The Movie Channel) into a twin turbo vehicle, with enhanced content on its own channels (most crucially the new Sky Sports) and a range of third-party services that it retailed to customers – MTV, UK Gold, CNN, Nickelodeon, Turner and the like. Of these, it was actually the launch of “Sky multi-channels” which provided the single biggest boost to satellite dish sales – more than world cup cricket from India or the first Premier League season.

At the time, the Premier League contract was the biggest business risk BSkyB had undertaken. But it quickly proved its worth, and by 1994, BSkyB was significantly profitable, which it has remained ever since, apart from a short period of heavy investment in the transfer from analogue to digital technology. It is now a £10 billion behemoth on the London Stock Exchange, and is still effectively controlled by Murdoch, though these days with a reduced stake of only 39 pecent.

As cable went through a laborious process of consolidation – completed only in 2007, as NTL and Telewest combined to form Virgin Media – Sky continually tried to use its growing market power to constrain its most obvious competitor for content.  All the Hollywood studios had signed output deals with either Sky or BSB, so when they merged – and after BSkyB had de-negotiated some of the more punitive contract conditions the studios had extracted from the prior rivalry – the satellite company had a complete lock on major movies.

BSkyB ensured that each contract expired at a different time, making it effectively impossible for cable ever to assemble a substantial Hollywood offering, or for any of the studios to break away from BSkyB.  When cable thought it had secured exclusivity on a Disney Channel, BSkyB trumped it with a higher offer.

In sport, too, occasional forays by individual cable companies into the rights market were inconclusive. The package of Sky’s sports channels only faced meaningful competition from terrestrial broadcasters.  Once Sky had got its nose sufficiently far in front in terms of subscribers, no cable company – even the unified Virgin Media – could afford to take the risk that an expensively-assembled sports service might fail to secure a worthwhile carriage deal on the Sky platform. The recent collapse of Setanta Sports illustrates the expense and hazard involved in such a course of action.

Regulators have consistently ruled that BSkyB has reached a dominant position in the supply of sports and movie channels. I do not entirely agree in the case of movies – something like half BSkyB’s film inventory is acquired in the open market, not as part of Hollywood output – but the question has always been what, if anything, to do about dominance.

The first stance of the competition authorities has been to impose a “must supply” rule. In other words, having cornered the pay TV market in major sports rights, BSkyB is required to supply its channels to other pay operators. Until now, that obligation has been evaded in two ways: first, by diverting effort and marketing away from standard definition (SD) channels (which are the subject of the “must supply” rule) and towards high definition (HD), which is excluded; and secondly, by slyly offering the channels to the likes of Virgin Media at a rate calculated to be profitable only if Virgin Media were on the same scale as BSkyB (it is actually one-third the size).

The Virgin Media rate-card has subsequently been offered to even smaller operators, with the predictable outcome of no takers. As Ofcom has concluded, “the rate card prices are set so as to allow a retailer of Sky’s scale to compete effectively, and there is only room in the market for one such retailer”. The practical effect of this pricing is to make it impossible for the competitor to sell premium channels on at a profit.

As a result, there is a profound difference between the two sets of subscribers, at BSkyB and at Virgin Media. Some 80 percent of BSkyB’s customers take one or more movie or sports channels in their package; but only 20 percent of Virgin Media’s customers do so. Otherwise, the two sets of subscribers have very similar characteristics, both in demographic profile and in the amount they spend with their supplier.  The explanation is that Virgin Media has no incentive whatsoever to promote such channels to its customers, and instead pushes other products – like video-on-demand – in its marketing strategy.

If Virgin Media were incentivized by a wholesale price for premium channels that led the “missing” 60 percent of Virgin Media’s customers to take one or more of them, BSkyB would earn hundreds of millions of pounds extra, nearly all of which additional revenue would convert into profit. In the case of movie channels, BSkyB would incur additional fee obligations to the Hollywood studios, where contracts are arranged on a per subscriber basis. With sport, where the rights owners settle for fixed fees, all BSkyB’s additional revenue would be clear profit. True, the wholesale fees from the existing 20 percent would be reduced somewhat: but this would be massively outweighed by the quadrupling of customers.

Why does BSkyB behave in this perverse way? Ofcom has no doubt, drawing from the evidence in the extensive correspondence between BSkyB and potential new retailers such as BT and TopUp TV.

“Sky restricts distribution of its Core Premium channels to new retail customers in a way which is prejudicial to fair and effective competition. A number of companies have tried and failed, over an extended period of time, to negotiate terms with Sky which would allow them to retail premium channels to their customers.

“Our review of these negotiations reveals lengthy and ultimately fruitless discussions over a number of years between Sky and other pay TV operators over possible wholesale of Sky’s premium channels. This impasse has remained despite, as Sky agrees, there being an immediate financial benefit to Sky from wholesale supply. We believe this is because Sky is acting on two strategic incentives – to protect its retail business on its own satellite platform, and to reduce the risk of stronger competition for content rights.”

There could not be clearer evidence of a dominant player in one sphere of economic activity leveraging its power into another sphere.  It is to prevent such abuse that we have competition rules. Unfortunately, our competition regime is relatively weak compared with – say – Germany’s, where the Cartel Office can block an array of activities, with its decisions becoming immediately implementable.

For instance, BSkyB’s overnight purchase of 17.9 percent of ITV in 2006 would have been instantly overturned by the Cartel Office, as it was so clearly designed to frustrate a possible merger between ITV and Virgin Media. BSkyB claimed it was a “strategic investment”, but no analyst believed that for a moment: indeed, the subsequent collapse of the ITV share price and the absence of any conceivable strategic benefit in the purchase would have ended the careers of the responsible executives in any normal company – in this case, they were promoted to Chairman and CEO.

BSkyB managed to hang on to this ITV stake for three years, despite being repeatedly instructed by competition authorities to divest.  This outcome was the result of the immense length of time competition appeals take, and the permission for the status quo ante to prevail during the appeal.  The adventure cost BSkyB over £600 million, but was deemed to have been well worth the cost if it frustrated Virgin Media.

Likewise, the attempt to impose on Virgin Media a massive price increase for BSkyB’s basic channels led to the removal of these channels from cable just as Sky One’s top-rating series, 24, was about to start transmissions.  The cable company lost some subscribers to satellite, but the bigger financial loss was BSkyB’s, as one-third of Sky One’s audience and advertising disappeared along with cable carriage.  BSkyB is clearly willing to suffer damage (which it can well afford), provided rivals suffer too.

And BSkyB has become notorious for taking on regulators, winning some battles, prolonging others, and generally giving the competition authorities pause before embarking on any restraining course.  The latest Ofcom inquiry has lasted more than three years, and the final document – published on the last day of the three-month period that Ofcom had designated for release – showed significant concessions as compared with the consultation document issued last June.

The headline has been that Ofcom is enforcing a wholesale price on BSkyB, whose response has been to complain bitterly about interference in commerce (as if all competition rules were not just such an interference), stifling of innovation (these are channels launched between eighteen and 22 years ago) and denying entrepreneurs a fair reward for risk (these channels have been profitable for at least seventeen years – drugs company patents, which involve much higher risk than signing a contract with the Premier League, are only allowed to run for seven years before generic versions are allowed to compete).

Yet beyond the headline, there were real concessions to BSkyB. Movie channels were excluded from the obligatory wholesale pricing, on the grounds that on-demand viewing was displacing linear scheduling of movies.  Instead, Ofcom chose to refer to the Competition Commission the issue of monthly subscriptions to on-demand movies, where BSkyB has secured the exclusive rights as part of its Hollywood deals, but barely exploits them. Ofcom believes there is a good case for making such warehoused rights non-exclusive.

The other pay TV operators were disappointed by the exclusion of movie channels, and also the exclusion from obligatory wholesale pricing of HD versions of the premium channels – these had to be offered on fair, reasonable and non-discriminatory terms (which was new) but no price was set (inviting the familiar delays in supply).

The other operators were also disappointed by Ofcom’s agreement that BSkyB (and its platform partner in digital terrestrial television, Arqiva) could launch premium services on Freeview, thereby potentially extending their dominant position to another platform with 10 million users. Ofcom softened the blow by linking this permission to a requirement for wholesale deals for the premium channels at long last being signed with the new operators: but added a further concession to BSkyB in designating wholesale discounts that were much lower than had been expected.

The newspapers talked of a 23.4 percent discount on the cable rate card for each of Sky Sports 1 and 2. However, most sports fans subscribe to both channels, and the discount required for dual sports was just 10.5 percent, or £2 per month. In practice, rather than continue arguing the toss with BSkyB over arcane calculations around returns on investment and margin squeezes (the previous arena of endless disputes), Ofcom simply came up with the lowest discount to BSkyB’s own retail prices that was consistent with allowing new operators to make some profit and so offer consumers more choice.

Ofcom displayed its impatience with BSkyB’s constant delaying tactics by using an obscure clause in the 2003 Communications Act to impose the obligatory wholesale pricing. This clause requires Ofcom to ensure fair and effective competition in the areas it regulates, and provides for far swifter outcomes than relying upon the 2006 Enterprise Act.

BSkyB’s only counter-moves are to seek judicial review over the use of this clause – and it is extremely rare for any public authority to be found to have behaved irrationally, which is the hurdle BSkyB would have to overcome – or to ask for an interim injunction on the grounds of likely irreparable damage to its business from immediate implementation.

Where could such damage arise? BSkyB could argue that the £2 per month reduction in the price of combined sports channel subscriptions on Virgin Media could cost nearly £20 million a year, if it led to not a single new sports subscriber on cable. Even this deeply improbable outcome could scarcely cause irreparable damage to a company that spends over £1 billion a year on marketing. Moreover, the court would hear that BSkyB has repeatedly rejected offers from Virgin Media to guarantee current levels of wholesale income in exchange for a reduction in price.

The reality is that if – as is reasonable to expect – more than one million extra dual sports subscribers were, over time, recruited by Virgin Media, the cable company would thereby earn over £30 million a year from their retail margin, but it would deliver to BSkyB over £200 million of extra annual profit.

Would many satellite customers therefore transfer to cable? There is very little such traffic. However, where BSkyB is more anxious is with regard to the operators who would allow customers to subscribe directly to sports channels, without having to “buy through” an expensive basic tier of non-premium channels – the rule with both BSkyB and Virgin Media.  The basic tier is where both companies make their largest margins: 85 percent profit is achievable. If BT and its likes were able to offer a lower price buy through or a straight purchase of premium, there might be a temptation for those who only want sport from pay TV to cancel their BSkyB subscription.

More likely, though, is that if BSkyB itself were offering a straight sport option on Freeview, it would compete very effectively. Of course, there would be some risk of cannibalising its own full-price satellite customers, but the prospect of being able to market its premium channels to the 10 million Freeview customers, throwing in an upgraded decoder box, must surely outweigh that risk.

Nonetheless, BSkyB’s over-the-top rhetoric has at least persuaded some of its sports body clients to join in the howls of protest at Ofcom’s ruling.  The Rugby Football Union, the Premier League and the English Cricket Board have been the most vocal in claiming that sport is at risk if BSkyB’s riches are endangered. They seem not to have registered that the largest beneficiary of Ofcom’s intervention is likely to be BSkyB.

Indeed, if they had any sense (a rather more remote prospect), they would convert their fixed price deals with BSkyB to the per subscriber deals that the Hollywood studios and all suppliers of channels to BSkyB have in place. If these sports switched to a per subscriber basis, combined with a minimum guarantee, they would stand to benefit directly from a wider take-up of sports channels. The most notable feature of the Ofcom process was the public silence from the Hollywood studios in relation to the prospect of obligatory wholesale pricing: as Sherlock Holmes tells Watson, pay attention to the dog that did not bark.

For the chief executive of the Rugby Football Union to talk of Ofcom “confiscating” the Rugby Football Union’s rights, or endangering its £15 million a year income from BSkyB, shows such a lack of economic or political sense that one seriously hopes his successor will learn from his errors.

Cricket, too – which has a good case for its Ashes tests not to be reserved for terrestrial television, to its economic detriment – is in danger of becoming so obvious a client of BSkyB that politicians and regulators cease to treat it as an independent voice. Placing yourself so decisively – and on the basis of so little understanding – on the side against consumer choice and fair competition seems, at the least, unwise.

The stock market, as is often the case, told us a lot more than the squeals of protest. BSkyB’s share price rose sharply after publication of the report, whilst BT’s was static. Virgin Media’s stock has also risen, but more in response to the Ofcom ruling reducing mobile phone charges (published the day after the pay TV review), from which it will benefit.

This later Ofcom intervention in the free market – unlike the pay TV review – attracted no protest from the commentariat. Vodafone, o2 and Orange have seemingly fewer editorial friends than BSkyB. People understandably love Sky Sports: its scope, its commitment, its expertise, its quality and its sheer lavishness (if not its price). The current heavily subsidised experiments in 3D are all part of the message that BSkyB is endlessly innovative. According to sky.com, my nearest 3D pub for the next big match is 0.7 miles from my home!

On the merits of the argument, Ofcom have clearly prevailed. Whether it can actually push through its carefully nuanced findings, when facing the UK’s most determined and richest opponent of regulatory intervention, is quite another matter.

NB David Elstein, a former board member of Virgin Media, former head of programming at BSkyB, and former supplier of channels to both, has no economic interest in the outcome of the review.