Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
� We revised some of our switching assumptions to move downwards the
proportion of customers we would expect to choose Sky over Virgin Media if
premium channels were withdrawn from cable.
6.99 On the basis of our revisions, it appears that the revenue effect of withdrawing
wholesale supply to Virgin would be negative over a longer initial period than we
previously estimated – up to 11 to 12 years. This suggests that, at current prices, Sky
is likely to have a stronger incentive to supply to Virgin than we estimated. However,
we note that:
� The prices at which Sky supplies to Virgin Media, discussed below, are an
important factor in this calculation: Virgin Media has argued that at current prices
it does not have an incentive to compete aggressively in the retail of Core
Premium channels 402 . If Sky were required to supply to Virgin Media at a lower
price, its wholesale revenues could increase or decrease (depending on whether
the lower price attracted a sufficiently greater volume of new cable subscribers to
counter the lower per-subscriber price), but its revenues as a retailer would tend
to decrease if this led to switching from Sky to Virgin Media.
� Our Vertical Arithmetic analysis merely compares revenue streams from
wholesaling and retailing. It does not take account of Sky’s strategic incentives.
Sky’s reasons for supplying Virgin Media
6.100 Sky argued that the effect of past competition enquiries into Sky’s business was that
Sky “already operated under a de facto ‘must supply’ requirement in relation to
cable”. 403
6.101 We note that in light of this de facto must supply arrangement, we cannot interpret
the fact of Sky’s current supply to Virgin Media as evidence of an ongoing
commercial incentive to supply, whatever may have been its original incentive in the
1990s. In particular, we cannot regard it as evidence that Sky currently has a
commercial incentive to supply Virgin Media which outweighs any strategic incentive
to withdraw supply.
6.102 Sky also argued that it had begun to supply premium channels to cable operators
without being required to do so. Again we note that if Sky believes that it is obliged to
supply premium channels to Virgin, it cannot also argue that its currently supplying
Virgin is evidence that it has a commercial incentive to do so. In addition, we note
that the terms on which cable operators were initially offered Sky’s channels
prompted intervention by the OFT (see paragraph 6.26).
Internal documents
6.103 Documents which Sky disclosed during High Court proceedings, [ � ].
6.104 [ � ]:
[ � ].
402 Virgin Media response paragraph 6.12, 6.13.
403 Sky response, section 5, paragraph 2.6(b).
201