Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
� [ � ] 437 . It seems that, on balance, there is unlikely to be a substantial change in
the way these rights are awarded in the UK in the short to medium-term.
6.151 Not only does Sky not provide onward supply of services based on these rights, it
also does not exploit them fully itself. Sky’s premium movies channels are currently
available on SVoD only through Sky Player to the PC. This presumably reflects the
fact that its satellite platform is not well suited to the exploitation of these rights.
6.152 Sky’s strategy in relation to these rights is illustrated by evidence from information
request responses, in particular, [ � ] 438 .
6.153 [ � ] 439 [ � ] 440 . [ � ].
6.154 We believe that Sky has an incentive to restrict exploitation of these subscription VoD
rights, in order to protect its own linear movie channels, which are the only means by
which it can deliver movie content on its satellite platform. Furthermore, it appears to
be acting on this incentive.
Wholesale pricing of Core Premium channels
Our views in September
6.155 We noted in our Second Pay TV Consultation that the wholesale market power which
we had identified might be exploited not only by restricting distribution of premium
content, but also by setting high wholesale prices for that content. However, the
evidence of high wholesale prices was not clear-cut. This is due to a variety of
practical difficulties associated with an analysis of wholesale prices for content. We
considered a range of evidence on both retail pricing and Sky’s profitability to
address this question.
6.156 We noted that when a seller of a product is in a position of market power, it can
potentially set prices above competitive levels. Sky retails directly to around [ � ]%
of subscribers to its Core Premium channels, and supplies the remaining [ � ]% at a
wholesale price determined by a rate-card which we understand to be designed to
give cable firms just enough margin – if they retail at the same price as Sky – for Sky
to pass its interpretation of the OFT’s margin squeeze test (see paragraph 6.109).
6.157 As such, Sky effectively controls the retail prices of its Core Premium channels. It can
set its own retail prices at an optimal (profit maximising) level, and set its wholesale
price to cable operators which will require them to charge the same or a similar price.
The returns that cable firms can earn from retailing Sky’s Core Premium channels
are constrained by the rate-card. If we were to consider Sky’s retail business as a
purchaser of wholesale content at rate-card prices from its wholesale business, then
this retail business would face the same constrained returns as a retailer. Under this
interpretation, if Sky were to earn monopoly profits we would expect these to be
extracted at the wholesale level.
437 [ � ].
438 [ � ]. Provided by Sky in response to information request of 14 May 2008.
439 [ � ]. Provided by Virgin Media in response to information request of 23 May 2008.
440 [ � ]. Ibid.
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