Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
130
� The number of subscribers to Sky Movies has declined over the past few years
despite constant real prices.
� We can see a growing number of potential substitutes which some consumers
find attractive: PPV VoD, DVD rental, online downloads, and a greater number of
films on FTA TV. However consumption of movies on FTA TV is declining in line
with reductions in the consumption of Sky Movies.
� Our consumer survey evidence and analysis of BARB data suggests that access
to new films is an important feature of premium movie channels, and that
channels containing older films or other film content are likely to be a weak
substitute.
� Our evidence on pricing of DVDs, and our consideration of the different
characteristics of DVDs and premium movies, indicates that these are likely to
represent relatively weak substitutes for premium movies.
� Online DVD rentals may represent a small but growing constraint on Sky Movies.
However, analysis of rentals volumes over time suggests the growth of this
format may be largely driven by switching from over the counter rentals.
� Similarly, although downloading films may become a more important factor,
relatively few consumers currently use such services.
� Our analysis of elasticity evidence suggests a weak response to price changes,
which is insufficient to constrain a hypothetical monopolist, indicating that
consumers’ price sensitivity would not constrain a hypothetical wholesaler’s
prices to the competitive level. As with premium sports, retail and wholesale
prices may well be above competitive levels, and we therefore need to interpret
consumer switching behaviour with care: high switching rates at competitive
prices could indicate a need to broaden the relevant market, but high switching
rates at higher prices would be consistent with a narrow market.
� We have seen programming costs decline in real terms, but wholesale prices
decline to a lesser extent. This appears inconsistent with a view that the
constraint on wholesale prices has been increasing. In addition, in our view
Oxera’s analysis suggests that wholesale margins for Sky’s movie channels are
higher than for its sports channels (see section 6).
4.377 On balance, we believe it likely that the wholesale supply of channels which include
the first TV subscription window of movies produced or licensed by any of Universal,
Viacom, 20 th Century Fox, Walt Disney, Sony or Time Warner or their wholly owned
or controlled subsidiaries (“Core Premium Movie channels”) form a relevant market.
However, we observe that the constraint from other ways of watching films is growing
and may grow further in the future. We consider online rental DVDs, PPV, films on
FTA and basic tier TV and online downloads to be the closest substitutes, but their
inclusion in the market would not affect our assessment of market power.
4.378 The market is likely therefore currently to include the following channels 262 : Sky
Movies Action & Thriller, Sky Movies Comedy, Sky Movies Drama, Sky Movies
Family, Sky Movies Premiere+1, Sky Movies SciFi & Horror, Sky Movies Screen 1,
262
See also appendix 3 of Annex 6 for an assessment of which Sky Movies channels are defined as
Core Premium Movie channels.