Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
� Incentives: we would want prices to evolve in a way that neither causes artificial
reduction of rights values, nor creates an incentive to engage in inefficient
behaviour.
� Gaming: given our view on Sky’s incentives to restrict distribution of its channels,
we are conscious of the possibility that Sky could seek to manipulate pricing rules
to its own advantage. For example, it might seek to apply pressure to
competitors’ retail margins. We would want our approach to the evolution of
prices to minimise the scope for manipulation as far as possible.
9.38 Given our focus on a retail-minus pricing calculation, our starting point in principle is
to expect wholesale prices to evolve over time in a way that maintains the margin
between retail and wholesale prices. This approach helps to addresses obvious
concerns of margin squeeze which would arise from a reduction in Sky’s retail prices
where wholesale prices remained static. However, it is worth considering more
generally how we might expect wholesale prices to evolve in response to change.
9.39 There are a number of different types of changes to consider. Four broad categories
are:
i) Significant changes in wholesale channel costs: for example, Sky might move a
part of its content from one channel to another for commercial reasons, thereby
significantly changing the costs, quality and value of the channels subject to the
remedy. In a more extreme case, it may choose to launch a new channel on
which it shows much of the most important content. The same situation would
arise if Sky were to lose a substantial portion of the rights it currently licenses. If
these types of changes were sufficiently material, it may well be appropriate for
wholesale prices to change, requiring a reassessment of the pricing calculations.
It may even require a reassessment of which channels should be subject to the
wholesale must-offer remedy.
ii) Significant changes in retailing costs: for example, if the efficient costs of retailing
increased unexpectedly and this level of expenditure was not reflected in the
initial retail-minus calculation, then it would be appropriate for wholesale prices to
be adjusted downwards in response to the higher retailing costs. Conversely, an
upwards adjustment to wholesale prices would be appropriate in response to a
significant decrease in the retailing costs of an efficient retailer. If these types of
changes were sufficiently material, as above, the only plausible option is likely to
be to reassess the full set of pricing calculations.
iii) Significant changes in retail pricing structure: A significant change in wholesale
channel costs (e.g. for the reasons raised in point i) above), might be expected to
change the relative cost and value of channels and therefore the relative prices
for the wholesale channels. As in i) above, this would be likely to require a
reassessment of the pricing calculations. However, given our expectation that
Sky will have sought to optimise its current retail prices, we would not expect a
significant change in relative retail prices absent a change in content costs or in
demand.
iv) Minor changes to retail prices: for example, Sky routinely revises its retail prices
once a year in September, taking account of consumer demand and preferences.
In this case, we would want, as far as possible, for wholesale prices to respond
appropriately, without the need to reopen the full set of pricing calculations.
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