Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
6.105 [ � ]:
202
[ � ] 404 .
6.106 We asked Sky to provide us with any relevant strategy documents relating to the
supply or potential supply of its Core Premium channels to Virgin or other cable
retailers since January 2006. [ � ] 405 . We take this as indicating that Sky has not
reconsidered its strategy towards supplying its Core Premium channels to cable
retailers in more than three years. This is consistent with Sky’s view that it is under a
de facto must supply arrangement (see paragraph 6.109 below).
6.107 In summary, Sky currently considers itself under a must-supply obligation as regards
Virgin Media. 406 Whether Sky would supply Virgin Media in the absence of this
obligation is unclear, and depends on the terms of supply. Our Vertical Arithmetic
indicates that withdrawing supply from Virgin Media would be costly to Sky given the
current terms of supply. However, there is evidence that Sky weighs short-term
revenue considerations against its strategic incentive to weaken or eliminate Virgin
Media as a competitor.
Terms of supply to Virgin
6.108 We now consider the terms under which Sky wholesales its Core Premium channels
to Virgin Media. In particular, we consider:
� How Sky sets its terms to Virgin Media.
� The effect of these terms on Virgin Media’s incentives.
� The outcome in take-up of Core Premium channels by Virgin Media customers.
� Whether take-up rates reflect a difference in the make up of Sky and Virgin Media
customer bases.
� Non-supply by Sky of additional services to Virgin Media.
How Sky sets its terms
6.109 Sky told us that since 2002 it had continued to supply cable operators at a price
which believed was compliant with the test laid down by the OFT 407 :
[ � ].
6.110 The threshold at which a margin squeeze abuse occurs is necessarily high. In other
words, rather than entering into negotiations to establish a mutually beneficial price,
our understanding is that Sky has, for the past seven years, been setting its price
level by calculating the price just below an abusive price, as determined by the OFT
in 2002. Sky appears to present the margin squeeze price as a floor beneath which it
404 [ � ].
405 Sky response (14 th April 2009) to final Ofcom information request, question 6.
406 Sky response, section 5, para 2.6(b)
407 Information request response, 28 July 2008.