Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
7.107 In view of this, if Sky earns high wholesale margins, this will tend to translate into
high prices for both its DSat retail subscribers and for Virgin Media (and other cable)
subscribers. But the fact that these margins are earned at the wholesale level rather
than the retail level is only important insofar as it reflects Sky’s margin-squeeze-testbased
approach to setting rate-card prices.
7.108 Turning to the question of whether Sky earns different margins for its movies and
sports content as set out at paragraphs 6.196 to 6.199, Oxera’s analysis indicates
that Sky may earn higher margins for movies.
7.109 However, this does not necessarily mean that retail prices paid by subscribers to
Core Premium Movies are less good value than those paid by subscribers to Core
Premium Sports. Rather, it may be that upstream content providers of sports content,
such as the FAPL have been more effective in capturing monopoly rents from Sky
than movie content providers, such as Hollywood studios.
7.110 In view of Sky’s control over the Core Premium channels which would be essential
for an entrant or other player to challenge its current position, we see no prospect
that competition will intensify in the foreseeable future, such as to drive down prices.
7.111 We recognise that in some circumstances consumers’ interests can best be served
by allowing firms to take risks in order to establish a strong market position based on
an innovative product, and subsequently to earn high returns as a reward for those
risks. Sky took on substantial risk in establishing its pay TV business in the early
1990s, and in switching its service to digital in the late 1990s. Since then Sky has
continued to invest in new services such as HD.
7.112 However, given the time that has passed since Sky made its riskiest investments in
the UK pay TV market, we do not consider that ongoing high prices can be justified
by Sky’s history of investment. We do not believe that in seeking to address the
conditions which currently allow Sky to sustain high prices to pay TV subscribers, we
would be acting against the interests of consumers.
Conclusion
7.113 We consider on the basis of the above that Sky’s approach to the wholesale supply
of Core Premium channels results, and is likely to result in future, in an adverse
effect on the interests of consumers.
Consultation questions
6. Do you agree with our characterisation of the relationship between high wholesale
prices and retail pricing?
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