Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
report is attached at Annex 9. Oxera’s study applies a conceptually appropriate
framework for valuing intangible assets and estimating profitability in the context of
competition investigations, as set out in the Oxera 2003 report for the Office of Fair
Trading and previously used by the Competition Commission.
1.36 The key conclusion is that, when modelled under a range of different assumptions,
time periods and measures of profitability, Sky appears to have made an aggregate
return of above 20%, significantly above its current cost of capital. We need to
exercise care when interpreting historic returns during periods when Sky was
developing a new business with a potentially significant risk of failure. However, Sky
now has a stable and increasingly diversified business, so these considerations are
less relevant on a forward-looking basis.
1.37 Oxera has also carried out a disaggregated analysis of Sky’s profitability. The results
are less reliable than the aggregate analysis, due to various issues associated with
the allocation of costs, revenues and assets. The disaggregated analysis does
however lead us to the view that:
� Wholesale returns are greater than retail returns.
� Wholesale returns are above those of appropriate comparators.
� Within wholesale, although there is uncertainty about the precise figures, it is
likely that movies returns are greater than on sports.
1.38 This profitability analysis excludes any monopoly rents which may be retained by
rights owners. Such monopoly rents may exist where much of the content
aggregation is carried out by rights owners rather than by Sky, as is the case for
example with the live FAPL rights. However, we have not attempted to estimate
these, since it is likely to be extremely difficult in practice to distinguish them from any
scarcity rents associated with the talent which underpins the production of high
quality content. In other words, the high salaries paid to some footballers and movie
stars may be an indication of market power, but could also reflect the scarcity value
of football skills and movie talent.
Effects on consumers
1.39 We noted in our Second Pay TV Consultation that markets where competition is
weak, and consumers are unable to exercise a real choice between suppliers, are
unlikely to deliver the best outcomes for consumers. We set out several criteria
against which we proposed to assess the operation of the market from a consumer
perspective, focussing on choice, innovation and pricing. We think the current and
future effects on choice and innovation of Sky’s approach to the wholesale supply of
Core Premium channels are such that we need to consider an intervention under our
sectoral powers to ensure fair and effective competition in the interests of
consumers.
Consumer choice
1.40 The most obvious manifestation of reduced consumer choice is the restricted
availability of Sky’s premium content on other platforms. The fact that consumers on
a number of platforms are currently either unable to access the most valuable sport
and movie content, or face restricted access, is a source of concern. We consider the
effect on different groups of consumers:
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