Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
5.152 Entry using DTT as a distribution technology is possible, as shown by the entry of
Top Up TV and, more recently, by the entry of BT Vision. Moreover, as explained in
section 10 there is likely to be a significant level of unmet demand on that platform
(as also shown by Sky’s proposal to launch its own service “Picnic” on DTT).
However, at this stage it is not clear whether further entry is actually likely.
Establishing a significant base of set top boxes would require a material lead time
and involve significant costs, although we recognised that these costs will be partially
mitigated since DTT consumers are typically able to use their existing aerial and
internal cabling 332 .
5.153 The ITV-Sky CC Report found that entry by IPTV retailers using local loop
unbundling involved substantial investment costs (paragraph 4.96). Orange
previously announced that it intended to launch an IPTV service (originally in 2007), [
� ] 333 . [ � ].
5.154 As discussed in paragraph 9.34, while there are some fixed costs (e.g. marketing),
these are not huge, especially as a proportion of the total costs of a scale operator.
We also believe that economies of scope exist between different channels and
services supplied by pay TV retailers. For example, the average cost per channel of
a set top box subsidy will fall the more channels that a subscriber is supplied with.
This implies that existing retailers that already supply a range of channels (such as
Top Up TV or BT Vision) may enjoy a cost advantage over new entrants that only
retail Core Premium Sports channels. Accordingly, new entrants may seek to also
supply a range of services.
Conclusion
5.155 As discussed above, there appear to be appreciable costs involved in a consumer
switching to a number of retailers, particularly Virgin Media and Sky’s DSat business
(although switching costs vary depending on which retailer a customer is switching
to). There is also a degree of product differentiation as well as significant barriers to
entry for retailers that are not already in the market. This suggests that, even if Sky
no longer exercised its wholesale market power, the intensity of retail competition
might not be high, at least in the short term. In particular, the presence of switching
costs suggests that there might be a time delay between any change in the way Sky
behaves at the wholesale level and any resulting change in its position in the retail
market.
Retail television bundles containing Core Premium Movie channels
5.156 Currently only Sky and Virgin Media retail Core Premium Movie channels. Sky retails
these channels on its DSat platform and Virgin Media retails them on its cable
platform 334 .
5.157 The remainder of this sub-section is structured as follows:
332 The CC previously concluded that a lack of available DTT capacity makes further entry unlikely.
Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the shares in ITV plc, CC, report
sent to Secretary of State (BERR) on 14 December 2007 (the “ITV-Sky CC Report”), paragraph 4.97.
333 [ � ].
334 Sky also directly retails some of its movie channels over Tiscali’s IPTV platform.
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