Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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for all bundles). Virgin Media has not been able to negotiate a wholesale price
that enables it to earn a higher margin on bundles including Sky Sports and/or
Sky Movies. This indicates that Sky’s wholesale charges have not been
effectively constrained by Virgin Media’s CBP.
� Fifth, Sky’s vertical integration. In any negotiation, the strength of a party’s
position depends on the negative consequences for it if it fails to strike a deal. As
noted in paragraph 6.106, it is unclear whether a failure to reach a supply
agreement with Virgin Media would be unprofitable for Sky, at least in the long
term 305 . In any event, even if it is unprofitable for Sky to fail to supply Virgin
Media, the costs to Sky will be partially mitigated by its vertical integration, since
at least some Virgin Media subscribers will respond by switching to Sky’s retail
business. This strengthens Sky’s position when dealing with Virgin Media.
5.71 In relation to retailers other than those on cable, we are aware of several retailers
that have sought wholesale access to Sky Sports and Sky Movies but have not been
able to reach commercial agreements. This contrasts with the example of Setanta,
which very quickly agreed wholesale deals with Virgin Media, BT Vision, Tiscali and
Top Up TV 306 . We set out the evidence we have reviewed on these negotiations in
section 6. We believe that the successive instances where commercial agreements
have not been reached are at least indications that Sky does not consider these
retailers to be essential outlets for its content. As such, we do not believe that these
retailers would be able to exercise significant CBP with respect to Sky even if Sky
were to wholesale Sky Sports to them.
Conclusion on countervailing buyer power
5.72 In summary, our view is that Virgin Media is the most likely retailer to exercise CBP
over Sky. However, we believe that, while Virgin Media is a significant outlet for Sky,
the commercial balance of the relationship appears to be strongly in favour of Sky.
We therefore believe that no party exercises sufficient CBP to counter Sky’s seller
power in the context of Core Premium Sports channels.
Conclusion on the wholesale supply of Core Premium Sports channels
5.73 In the light of Sky’s very high and sustained market shares, the existence of barriers
to entry and limited prospects for CBP, we consider that Sky holds market power in
the wholesale supply of Core Premium Sports channels. Even under the high
threshold established under the Chapter II prohibition of CA98, we consider that Sky
holds a dominant position, and that it is likely to be dominant for the next three to four
years.
Wholesale Core Premium Movie channels
5.74 A summary of our assessment of market power in the wholesale supply of Core
Premium Movie channels is set out below. First, a background section explains which
channels lie within the relevant market, summarises our position in the Second Pay
305 Our Vertical Arithmetic analysis indicates that failing to reach a wholesale supply agreement with
Virgin Media would be costly to Sky, relative to the current terms of supply. However, there is
evidence that Sky weighs short-term revenue considerations against its strategic incentive to weaken
or eliminate Virgin Media as a competitor.
306 Setanta also has an exclusive wholesale agreement with Sky in respect of commercial customers.