Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
8.77 As noted above, Sky argued strongly against imposition of an “extended retail-minus
price control”. Sky did not however set out an alternative form of price control, and
we interpret these comments as a general objection to any form of ex ante price
control, rather than an argument in favour of some form of alternative, such as costplus
pricing.
8.78 The Four Parties stated that both the retail-minus methodology and the cost-based
approach should be used, and therefore supported Ofcom’s suggestion to adopt a
retail-minus approach but use a cost-based analysis as a cross-check. This view was
based on concerns relating to Sky setting wholesale prices for its premium channels
in a manner that discriminates between different retailers and Sky setting high
wholesale prices now and/or in the future. Freesat also supported this approach, as
did BT and Virgin Media in their individual responses.
8.79 [ � ]’s submission argued against the use of retail-minus pricing, proposed by
Ofcom, as this would not promote the interests of consumers. Referring to Harbord
and Ottaviani’s paper on Anticompetitive Contracts in the UK pay TV market, [ � ]
pointed out the disadvantages of such a solution. It further believed that retail-minus
pricing is unsuitable because it will require considerable regulatory supervision. [ � ]
admitted that although a cost-plus model is more attractive, it still has certain
weaknesses. [ � ] noted that, should Ofcom favour a per-subscriber fee remedy, the
only suitable methodology for its application is long-run average incremental cost
(LRAIC). It argued that a per user / subscriber fee approach is not the only approach
and, indeed, may not be the optimal approach as the market matures. [ � ]
submitted that, on the basis of the Harbord and Ottaviani analysis, an ex ante pricing
rule giving resellers the ability to purchase wholesale content on a lump sum basis
should be available, potentially in addition to a per-user fee, as this is more likely to
enhance consumer welfare.
8.80 We continue to believe that the appropriate approach is to set prices on a retailminus
basis, using a cost-plus analysis as a cross-check. We acknowledge that costplus
pricing has a number of advantages:
� It allows us to set prices in a competitively neutral manner, without having to
consider how different models of downstream competition might be affected. In
particular it does not require us to make any assumptions about the platform or
distribution technology that a potential retailer might want to use.
� It can in principle address concerns relating to high wholesale margins as well as
availability of channels.
� It avoids some of the practical difficulties associated with setting prices on a
retail-minus basis. In particular it would not require us to tackle any of the issues
raised by retail bundling in the context of a retail-minus analysis.
8.81 However, there is a major issue with cost-plus pricing in the context of pay TV, which
is that it risks artificially depressing rights values. Firms are unlikely to bid vigorously
for content rights if the result of doing so is to push up the future wholesale price of
the channels they purchase from Sky. Indeed, if the outcome of a rights auction has
a direct effect on the level of wholesale prices, then some individual firms will have a
strong incentive not to bid, and there may even be an incentive for various forms of
coordinated behaviour.
8.82 Using a retail-minus approach does not give rise to the same concerns. Under retailminus,
changes in wholesale prices over time are not driven by the results of rights
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