Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
6.158 High wholesale prices would reflect the market power derived from content
aggregation. However, we also explained that it is not always entirely clear who is
likely to be the main beneficiary of the aggregation process. It is likely that many of
the rents flow upstream to where the aggregation took place. In the case of Core
Premium channels, the situations of sport and movies are subtly different.
212
� In sports there are different levels of aggregation taking place. Sporting bodies
such as the FAPL or UEFA aggregate content through the use of collective
selling, and this is then further aggregated by Sky through its purchase of the
rights to various different sporting events. If there were a fully competitive market
for the purchase of rights such as FAPL then we would expect the aggregation
benefits associated with those rights to flow entirely upstream to sporting bodies
themselves. To the extent that there was insufficient competition between
purchasers for the rights, then the purchasers might extract some of the rents.
� In movies, in contrast, Sky carries out the aggregation of content by purchasing
rights from all six Major Hollywood Studios. We considered that Sky was likely to
benefit from its role as aggregator and noted that there appeared to be less
intense competition for the movie rights, but it was also likely that the Major
Hollywood Studios could extract some of the benefit from aggregation in their
individual negotiations with Sky. We did not directly assess the balance of
negotiating power between Sky and the Major Hollywood Studios.
6.159 As well as a lack of clarity over where the benefits of the aggregation process accrue,
it can also be difficult to distinguish monopoly rents from scarcity rents, such as the
value placed on footballing or movie-making talent.
6.160 These considerations suggest that evidence of high profitability for Sky as a whole
would suggest that wholesale prices were above competitive levels – although it
would not be a necessary condition – since the monopoly rents associated with the
high wholesale prices could flow upstream. Similarly, evidence of high retail prices
would also suggest that wholesale prices were above competitive levels, with the
associated rents being extracted further up the value chain.
6.161 In our First Pay TV Consultation we attempted to carry out some analysis of the
profitability of the whole of Sky, for want of useful information on the industry as a
whole, as a way of attempting to establish whether consumers were suffering from
high prices. That analysis was inconclusive. We revisited it in our Second Pay TV
Consultation in light of consultation responses, but again found it to be inconclusive,
for similar reasons as the First Pay TV Consultation. These reasons focused
particularly on difficulties around establishing an appropriate asset base for a
company as light on tangible assets as Sky, on the difficulty of selecting an
appropriate time period, and on the cumulative impact of changes to the assumptions
we were making.
6.162 We also considered whether Sky earned monopoly profits in wholesaling its Core
Premium content. We treated Sky’s wholesale function – i.e. the purchase of content,
packaging into channels, and wholesale supply to Sky (as a retailer) and Virgin
Media – as a distinct business. We estimated the gross margin earned by this
business from sports as being between [ � ]% and [ � ]%, and that from movies as
being between [ � ]% and [ � ]%.