Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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� It could in principle address concerns relating to high wholesale margins as well
as availability of channels.
� It would avoid some of the practical difficulties associated with setting prices on a
retail-minus basis, in particular those associated with retail bundling.
1.60 However, there is a major issue with cost-plus pricing in the context of pay TV, which
is that it risks artificially depressing rights values. Firms are unlikely to bid vigorously
for content rights if the result of doing so is to push up the future wholesale price of
the channels they purchase from Sky. The approach which we have adopted is
therefore to set prices on a retail-minus basis, but use current costs, which are not
distorted by the existence of a wholesale must-offer, as a cross-check.
1.61 Should a must-offer include enhanced versions of relevant channels, or
associated services? In order for the supply obligation to be effective, the channels
which Sky supplies to other retailers must be of similar quality to those which it
supplies to itself. Any material difference in quality would be a form of non-price
discrimination, and is likely to reduce the effectiveness of the supply obligation. We
have identified two areas where this principle applies:
� We propose to include HD as well as SD channels in the remedy. The difference
in quality between HD and SD is already material to a significant number of
consumers, and this number is likely to increase in the future.
� We propose to include additional video-streams supplied via interactive ‘red
button’ services in the remedy, in circumstances where these contain actual
coverage of sporting events which might normally be shown on the main channel.
Examples are FAPL or UEFA Champions League matches, which might be
shown in this manner due to scheduling clashes. We do not propose to include
editorial content, which we see as readily replicable.
Pricing, and other conditions of supply
1.62 We have carried out a substantial piece of analysis to establish the appropriate level
for wholesale prices:
� We derive retail-minus prices by considering a discounted cashflow analysis. We
determine the wholesale price that an efficient retailer could afford to pay given
its own retail costs and the need to earn a return, while at the same time
matching Sky’s current retail prices.
� We cross-check these against cost-plus prices, also based on a discounted
cashflow analysis, by determining the price that Sky’s wholesale business would
need to charge to earn a reasonable return given its input costs.
1.63 We acknowledge that in addition to establishing the appropriate principles and
methodology there is a degree of judgement to be exercised, for example, in what
constitutes an ‘efficient’ entrant. We have based our analysis on Sky’s own costs, but
propose the following adjustments:
� Deriving prices for an entrant that would be as efficient as Sky at equivalent
scale, but has smaller scale due to more recent entry, while avoiding the costs of
market entry by inefficient sub-scale firms.