Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
Commercial incentives
6.55 In this section we consider the short term commercial incentives which Sky might
have to restrict wholesale supply of its Core Premium channels – i.e. the trade-off
Sky would face between increased wholesale revenues as new-to-Sky subscribers
accessed Sky’s channels on other platforms, and the loss of retail margins from
existing Sky DSat subscribers switching to other platforms (including lost revenues
on other services which Sky bundles with its pay TV channels). In doing so we
abstract from strategic incentives such as any concern Sky might have that
wholesaling its channels to other platforms would weaken its position in relation to
competitors – whether in terms of downstream retail presence, or bidding for content
rights.
6.56 In our Second Pay TV Consultation we noted 380 that our ‘vertical arithmetic’ analysis
indicated that Sky would have an incentive to supply its Core Premium channels to
DTT retailers at the cable rate-card price. We emphasised that this result was purely
indicative, and that Sky’s incentives were highly sensitive to its wholesale price.
6.57 Sky said that Ofcom’s own analysis shows that Sky would have a strong static
incentive to supply its premium channels to other retailers. Sky agreed that the
precise results were indicative rather than definitive, but said they provided no
evidence or basis on which to conclude that Sky has an incentive to withhold supply
of its premium channels 381 .
6.58 We agree with Sky’s reading of our Second Pay TV Consultation which showed that
Sky would have a static incentive to wholesale to DTT retailers, at prices as low as [
� ]% below the cable rate-card. This estimate should, however, be treated with
caution as it does not take account of the effect on Sky of:
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� The risk to Sky’s wider retail business of any lost revenue from bundling – i.e. if
Sky wholesales its Core Premium channels through a third party rather than
retailing, it loses the opportunity to bundle these channels with its other channels,
with additional TV services and with broadband and telephony services.
� The risk to Sky’s DSat business that, if it offered a discount on the rate-card to
DTT retailers it would have to offer the same discount to cable.
� The possible effect on Sky’s DSat business if DTT retailers passed on a discount
on the rate-card in lower retail prices. This could have a positive effect of growing
the market and increasing Sky’s wholesale revenues but also a negative (to Sky)
effect of causing Sky DSat customers to switch to DTT.
6.59 Sky argued 382 that failing to lower rates for less-efficient entrants could not be seen
as evidence that it is favouring its own platform and retail business. It argued that the
2002 OFT Decision established that Sky’s own retail business could afford to pay the
wholesale rates charged to cable operators and remain profitable. It said that the fact
that other retailers might not be prepared to pay them could not be used as evidence
that Sky was favouring its own platform. It added that if it were to offer new retailers
380 Paragraph 6.112.
381 Sky response, Annex 7, paragraph 3.10 (non-confidential).
382 Sky response, Section 5, paragraph 2.34-5 (page 70).