Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
concerned about the less-efficient entrant taking sales away from its more
established (wholesale) customers.
6.69 There are a number of arguments against Sky’s claim that supply is restricted
because other firms are less efficient than established retailers:
� Sky’s argument, that if it were a non-integrated wholesaler it would be concerned
about taking sales away from more efficient providers, is inconsistent with its
argument that inter-platform switching is likely to be limited.
� Sky has not sought to reach agreements for the wholesale supply of its premium
channels to third parties who have requested such supply. As such, it has not
had the opportunity to establish whether or not these suppliers are efficient. We
would expect a non-integrated wholesaler to engage in detailed price
negotiations, in order to establish whether entrant retailers were more efficient
than its more established wholesale customers.
� Even if other firms were less efficient than Sky at retailing its Core Premium
channels, there is an opportunity cost to Sky in being absent from a platform
while it tries (largely unsuccessfully to date) to negotiate access as a retailer.
Wholesale supply to an arguably less-efficient retailer is likely to be better for
Sky, from a short-term revenue perspective, than being absent from the platform.
Using our Vertical Arithmetic model, we estimate that, if Sky agreed to supply the
Core Premium channels currently planned for its Picnic proposal to a third party
DTT retailer then it would earn revenues of around £[ � ] per annum on DTT.
This illustrative figure is based on: (a) a wholesale price of £[ � ] (i.e. £[ � ]
below the rate-card price), (b) take-up rates similar to those which Sky expects
for Picnic, and (c) no reduction in Sky’s DSat subscribers.
� Our analysis of Sky’s business model for Picnic indicates that the proposed
service would not be profitable if Sky charged Picnic the wholesale rate-card
price for its premium channels. Again, this goes against Sky’s claim that an
efficient retailer could supply on DTT at the rate-card price, as Sky itself appears
unable to do so. In its profitability model, Sky modelled cashflows over [ � ]
years, [ � ] channels. However, after taking transmission costs into account 384 ,
stripping out a cross-subsidy from customers who do not take a TV product 385 ,
and making other small but in our view reasonable adjustments 386 , Picnic would
only be profitable [ � ] if it paid a wholesale charge [ � ]% below that on the
current cable rate-card for premium channels. This finding indicates that Sky
would not pass its own “efficient retailer” test on DTT.
384 Which Sky had excluded but which we consider a retail costs which Picnic would have to bear.
385
I.e. a contribution to common costs from stand-alone phone and broadband customers who would
not take the Picnic TV product.
386 Notably discounting future cashflows using an estimate of Sky’s weighted average cost of capital.
195