Pay TV phase three document - Stakeholders - Ofcom

Section 9
Pay TV phase three document – non-confidential version
9 Terms of a wholesale must-offer remedy
Summary
9.1 We have put forward the view that we should not only proceed to consider a
wholesale must-offer remedy, but we should include detailed terms in the scope of
the remedy – price being the primary condition.
9.2 We have carried out a substantial piece of analysis to establish the appropriate level
for wholesale prices:
� We derive retail-minus prices by considering a discounted cashflow analysis. We
determine the wholesale price that an efficient retailer could afford to pay given
its own retail costs and the need to earn a return, while at the same time
matching Sky’s current retail prices.
� We cross-check these against cost-plus prices, also based on a discounted
cashflow analysis, by determining the price that Sky’s wholesale business would
need to charge to earn a reasonable return given its input costs.
9.3 There are a number of issues of principle and methodology to consider in deriving
wholesale prices on a retail-minus basis. In summary, we propose to:
� Calculate prices for each combination of Core Premium channels that Sky makes
available to its retail customers;
� Start from the prices of the closest retail package to the wholesale product in
question, accepting that this includes different mixes of basic channels given
Sky’s current ‘buy-through’ retail pricing structure;
� Deduct direct variable costs as well as a pro-rated allocation of fixed and
common costs for basic content and retailing, to derive a retail-minus wholesale
price;
� Use a multiple year discounted cashflow analysis and terminal value calculation,
with a discount rate set equal to an estimate of Sky’s cost of capital, thereby
incorporating a return on investment;
� Derive prices for an entrant that would be as efficient as Sky at equivalent scale,
but has smaller scale due to more recent entry, while avoiding the costs of
market entry by inefficient sub-scale firms;
� Derive prices which allow efficient entry using not only a DSat platform but also a
DTT platform for distribution, given it is the most likely technology for potential
competitors to use in the short to medium term, and the technology which is most
likely to yield the greatest number of additional subscribers.
9.4 There are also a number of issues of principle and methodology to consider in
deriving our cost-plus cross-check. In summary, we propose to:
� Allocate Sky’s total costs to Sky’s wholesale channel business, consistent with
our retail-minus calculations, using independent data where available;
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