Pay TV phase three document - Stakeholders - Ofcom

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Pay TV phase three document – non-confidential version effectively for all subscribers. The analysis shows that the cost of acquiring new subscribers has increased over time, but by less than would have been expected in a perfectly competitive market. 6.202 More specifically, Oxera’s analysis suggests that the value of Sky’s subscriber base, and its IRR are higher than would be expected in a fully competitive market. Our view based on Oxera’s analysis is that in a competitive market new entrants would have reduced the profitability of the subscriber base and effectively competed for Sky’s most valuable subscribers. This would have had the effect of pushing Sky’s aggregate returns down considerably closer to its cost of capital. This does not appear to have happened. 6.203 Indeed, recent comments by Jeremy Darroch suggest that Sky believes there is scope for it to increase its profitability in the near future. At a recent conference, he stated that the business “feels like it’s on the cusp of a turnaround in profits and earnings” having “invested a lot over the last few years” 448 . This would suggest that Sky’s view is that more recent returns have been depressed by investment – perhaps in triple play, which is included in Oxera’s analysis – but that they are likely to increase in the future. 6.204 Oxera’s results also suggest that profitability is higher for Sky’s wholesale business than for its retail business. This is consistent with what we would expect from our economic analysis of the incentives that Sky faces, and Sky’s own statements about the way in which it determines its wholesale rate-card. 6.205 This result depends in part on the allocation of costs between Sky’s wholesale and retail activities - an allocation that is also relevant to our discussion of pricing in section 9 below. Oxera’s results are robust to using the same detailed cost allocation that we have used as part of our pricing analysis. In conjunction with our understanding of the way in which Sky sets its wholesale prices, the finding that profits are higher at the wholesale level helps provide assurance of the appropriateness of that cost allocation. 6.206 We recognise that further disaggregation of profitability beyond wholesale and retail activities needs to be treated with caution, because of the difficulties of attributing revenues to products that are sold in bundles, further challenges around cost allocation and the difficulty of allocating assets to particular lines of business. However, we believe that there is merit in looking at wholesale returns on sales for premium sports and premium movie channels. These products account for relatively few common costs and it is possible to identify the likely range of appropriate revenue allocations. Furthermore, a margin calculation does not rely on a view on asset allocation. It therefore provides an indication of the likely relativity between the two categories of product. 6.207 Oxera’s results suggest that wholesale margins for movies channels are higher than those for wholesale sports channels. This result holds even under the most extreme revenue allocation assumptions that we would consider reasonable. As with our view on wholesale returns versus retail returns, this result accords with our understanding of the way in which the market works – namely that, other things being equal, the rents associated with content aggregation are likely to accrue in large part to the content aggregator. 448 www.broadcastnow.co.uk/5002087.article 219
Pay TV phase three document – non-confidential version Consultation questions 220 1. Do you agree with Oxera’s approach to the valuation of Sky’s intangible asset base? 2. Do you agree with Oxera’s approach to assessing Sky’s profitability? 3. Do you agree with our assessment of Sky’s weighted average cost of capital? 4. Do you agree with the conclusions we draw about Sky’s aggregate profitability? 5. Do you agree with the conclusions we draw about Sky’s profitability at a disaggregated level?
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Pay TV phase three document Propose
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Section 1 1 Summary Pay TV phase th
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(4) In this section— Pay TV phase
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Ofcom’s views Pay TV phase three
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� Annex 3: consultation response
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Content aggregation and market powe
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Figure 67 Cost-plus cost stack £ p
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Pay TV phase three document - Stakeholders - Ofcom

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