Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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likely to be appropriate as it would enable the obligation to provide an effective
means of ensuring fair and effective competition, for a number of reasons.
� Firstly, a substantial length of time has already been spent by Sky and others in
commercial negotiation over the principle of supply, without any significant
progress, as we set out in section 6. We could in theory attempt to set pricing
principles in such a way that the level of the price is somewhat constrained.
However, regardless of what principles we might seek to set out, there would still
remain room for further negotiation on actual prices. A remedy which still left
scope for months or even years of negotiation on the precise level of prices (and
other terms) would not be effective.
� Secondly, if we did not set prices, it is likely that prices would ultimately default to
the cable rate-card. [ � ]. We do not believe this would enable us to ensure fair
and effective competition. As our subsequent analysis on pricing shows, the
current rate-card prices are higher than those needed for a rival retailer to be able
to compete. Indeed, as we set out in chapter 6, our analysis of Sky’s modelling of
Picnic’s profitability suggests that even Picnic would [ � ] 512 . In the case of the
one major existing competitor, Virgin Media, we see a likely link between the
current prices and the low penetration of premium customers on cable.
� Thirdly, we can also draw on the study of international examples of wholesale
must-offer remedies that we commissioned from Value Partners, which is
attached at Annex 11. This shows that the effectiveness of such remedies has
been hampered by the lack of definition of precise terms of supply. For example,
the remedy in place on Sky Italia did not initially include a price. Establishing a
price had to wait until the dispute resolution process was able to determine it.
Agcom (the Italian regulator) reflected on this to the effect that:
“If we were to design it [the wholesale must-offer remedy on the
merged Sky Italia] again, we would be more explicit about the pricing
rule and not give as much autonomy to Sky” 513 .
8.75 Prices are not the only terms that we might want to set. There are a number of other
important considerations involved in establishing wholesale agreements, such as
conditional access security in particular. The same principles apply to these as we
have outlined in respect to prices. In order to ensure the effectiveness of the remedy,
we believe it would be appropriate to restrict the scope for protracted future
negotiating around these terms, which might otherwise delay the successful
implementation of the remedy. We also address these further terms in section 9.
If we were to set prices, what approach should adopt?
8.76 Our Second Pay TV Consultation suggested that we might set prices using retailminus,
with cost-plus as a cross-check. Our reason for not using cost-plus as the
primary method was that we could see a risk of artificially depressing rights values.
We remain of the view that this is an important consideration, and therefore that
retail-minus pricing is the most appropriate approach in this instance.
512 Once we have made reasonable adjustments to Sky’s calculations – in particular [ � ].
513 See Value Partners’ report (Annex 11), page 16.