Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
258
auctions, but are set in relation to retail prices. A bidder in an auction does not see
the same increase in its own wholesale channel costs if it competes vigorously for
rights.
8.83 As set out in both of our previous documents, one of our key concerns is to ensure
that consumers have continued access to a wide range of high-quality content. That
position is likely to be undermined if the ability to generate a return on the production
of content is artificially reduced. On this basis we do not believe it is appropriate to
adopt cost-plus pricing.
8.84 As noted in section 4, owners of the rights to highly valued content could in principle
be able to extract some or all of the monopoly rents from these rights. We thus
accept the logic of [ � ]’s argument that the current price of rights may be inflated.
However we do not accept that this undermines our concern that the use of a costplus
approach would unduly depress rights prices. While the use of a cost-plus
approach would reduce the extent to which rights holders are able to earn unduly
high revenues, there is no reason to believe that it would result in rights prices at or
close to the true economic cost of the resources used to create those rights. Rather
there is a risk of overshooting, with the price of rights being driven below the
economically efficient level. This would undermine incentives for content generation.
8.85 We acknowledge that one important consequence of adopting a retail-minus
approach is that we cannot use our proposed remedy to tackle fully any concerns
that relate to high wholesale margins. To the extent that such concerns exist, they
would have to be addressed by some other form of intervention, probably related to
the way in which content rights are sold. Were we to intervene to tackle any high
wholesale margins this would also potentially address the unduly high rights prices
that [ � ] suggested exist. We return to this point in section 12.
8.86 As [ � ] observed, when setting price controls in other sectors that we regulate we
have used cost-plus approaches. However this does not imply that a cost-plus
approach is appropriate in this case. Our concern about the impact of a cost-plus
approach on rights prices reflects the specific characteristics of the pay TV industry in
particular:
� Rights costs are a significant proportion of wholesalers’ costs (so that, by altering
their behaviour when bidding for rights, firms can materially affect the regulated
wholesale price under a cost-plus approach).
� The firms that are likely to be eligible for supply under any wholesale must-offer
are also important determinants of rights prices (implying that important bidders
have the incentive and ability to affect rights prices).
� The downside of bidding less aggressively for content rights is likely to be small.
� Payments from UK pay TV operators make up a material proportion of rights
holders’ revenues, particularly in the case of sports, which implies that there is a
material effect on incentives for content generation.
8.87 We do not accept [ � ]’s argument that a retail-minus approach, unlike a cost-plus
approach, would impose significant ongoing regulatory burdens. [ � ] did not
elaborate on this argument and in particular did not explain why we would be
required to investigate complaints whenever Sky changes its retail prices. We
recognise that the relationship between wholesale prices (assuming that they are