Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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which dominance can be presumed under a CA98 analysis, in the absence of
evidence to the contrary. Moreover, we consider that there are significant barriers to
entry and expansion, including non-cable retailers’ lack of access to Sky’s Core
Premium Sports channels 326 . There is no CBP. Accordingly, applying the ‘standard’
market power test, the conclusion is that Sky enjoys a dominant position that gives it
the ability to sustain retail prices appreciably above the competitive level.
5.135 However, it is important to recognise the limitations of this conclusion. As explained
in paragraphs 5.115 to 5.118 above, it does not imply that Sky enjoys any additional
market strength (over and above its position at the wholesale level) by virtue of its
retail position. The wholesale supply of Core Premium Sports channels is
characterised by Sky’s dominance which gives Sky the ability to exercise its market
power at the wholesale level rather than the retail level (for example by using high
wholesale prices to raise retail prices, rather than by the exercise of retail market
power). Moreover, we do not consider that the finding of retail ‘dominance’ (applying
this test) is a necessary precondition for the competition concerns set out in section
6. Rather those competition concerns centre on Sky’s conduct at the wholesale level.
The ability to sustain retail margins appreciably above the competitive level
5.136 We now consider the more interesting question of whether, given the current level of
wholesale prices (including the implicit wholesale price paid by Sky’s retail arm), Sky
enjoys the ability to sustain retail margins that are appreciably above the competitive
level.
5.137 Logic and the available evidence suggests that Sky does not enjoy a material amount
of market power in the retail supply of bundles containing Core Premium Sports
channels, over and above its dominant position in the wholesale supply of Core
Premium Sports channels:
� First, [ � ] 327 . This suggests that Sky’s wholesale prices are unlikely to allow an
excessive retail margin to be earned. Accordingly, even if retail prices were
appreciably above the competitive level, this would reflect high wholesale prices
rather than the exercise of retail market power.
� Second, it may be more attractive for Sky to earn a high margin on Sky Sports at
the wholesale level rather than at the retail level. A £1 increase in Sky’s retail
margin only increases its revenue from consumers that it directly supplies. Also,
by increasing Sky’s retail price relative to that charged by Virgin Media,
consumers are more likely to switch away from Sky’s retail business. In contrast,
a £1 increase in Sky’s wholesale margin (including the implicit wholesale price
that it charges its own retail business) increases its revenue from consumers it
supplies indirectly via Virgin Media as well as the consumers it directly supplies.
5.138 Accordingly we do not consider that there is sufficient evidence to conclude that Sky
enjoys the ability to sustain retail margins that are appreciably above the competitive
level.
326 See also the discussion of switching costs in paragraphs 5.142 to 5.146 below.
327 Sky response dated 28 July 2008 to Ofcom’s information request dated 2 July 2008, paragraph 9.