In a 111 page report, the regulator outlined a range of concerns over the service, ranging from Sky's participation in the Freeview consortium to its "market power" in the provision of "core premium" content such as live sport and movie premieres. It said, however, that preventing Sky from launching new services on digital terrestrial television would be "highly interventionist" and that unless it were "convinced that such action is necessary and proportionate" it would be "wary" of blocking Picnic entirely.
In a separate but related report on the UK's entire pay TV market, Ofcom said that it may force Sky to make "core premium" content more widely available on a cheaper wholesale basis to other retailers because it has "market power" and "an incentive to limit the distribution of this content to competitors in a manner that favours its own satellite platform".
One of Ofcom's proposed remedies for Picnic is to insist that a "wholesale must-offer" obligation, whereby the content of Sky's premium channels - which at the launch of the service would consist of Sky Sports 1 and a Sky Movies channel - would be offered to competitors.
"Access to premium content is likely to enhance the attractiveness of the retail offerings of Sky’s competitors, providing them with greater opportunity to develop their brands and encourage the take-up of STBs compatible with their retail services," the regulator said. "In particular, in constructing an appropriate pricing structure as part of a wholesale must-offer arrangement, our underlying approach would be to develop it in a way that promoted effective retail competition with Sky, mindful of Sky’s strength in the retailing of pay TV services."
Ofcom also agreed with concerns that Sky, through its dominance in the provision of digital satellite set top boxes, may "have the ability and incentive to influence... manufacturers" to produce boxes capable only of receiving content encrypted with NDS conditional access technology, which it proposes to use on Picnic, and incompatible with Nagra encryption, which is already used by other pay TV providers on digital terrestrial television. The regulator said it would "monitor carefully the supply chain" to ensure that a market position was not abused but said that the provision of multiple conditional access systems in a single box would be unlikely to happen in any case "unless there was clear consumer demand for such a product". It suggested that the use of simulcrypt, where all retailers of pay TV services on digital terrestrial could offer Sky's "core premium" services using their own encryption technology on top of a single programme stream, would resolve the problem.
Other conditions under consideration by Ofcom include looking at Sky's future participation in the Freeview consortium. It noted: "We have a greater concern over Sky’s position on the board of DTVSL, should Sky’s Picnic proposal proceed, given its interests may no longer be aligned with those of Freeview as both services develop further."
The BBC told Ofcom: "There is... a concern that if Sky were to remain on the board of Freeview, they would be able to take decisions on its strategy when their interests (pay-TV) and those of Freeview (primarily free-TV) are no longer aligned. Whilst this is a matter for the board of Freeview, it remains the case that Sky could use its position to, for instance, slow down innovations on Freeview."
Earlier this month, Sky said it was suspending Picnic indefinitely, but that it would consider "whether to reactive the project when we have regulatory clarity". It is not yet known how Ofcom's latest consultation affects these plans.