Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
9.57 We therefore focus on deriving prices for a set of ‘factory gate’ products which
exclude any form of onward transmission. This is a set of products where the signal
is picked up via a leased line at Sky’s premises, so no payment is made to Sky for
the transmission of the channels to end users 530 . As a result, competing retailers
would have access to the Core Premium channels on the same basis, at the same
price, regardless of the cost of their chosen distribution technology. A competing
retailer would take this wholesale factory gate product, and in addition to the
wholesale price, would incur the costs of transmission as well as retailing, in order to
deliver a retail offering to its subscribers. The retail-minus price for the factory gate
product must therefore reflect an allowance for competing retailers for the costs of
transmission.
9.58 Under a cost-plus approach to setting prices, the same price would apply to all
retailers for the same factory gate product regardless of distribution technology.
However, in the context of a retail-minus approach, deriving a set of prices which is
consistent with this technology-neutral principle raises a number of challenges, given
that different distribution technologies entail different costs of transmission. The
question of whether our retail-minus methodology should consider a retailer incurring
the costs of DSat transmission, or the costs of transmission associated with a
different distribution technology is addressed directly in paragraphs 9.130 to 9.137.
Calculation methodology: retail-minus approach
9.59 As noted above, we believe that the right overall approach is to derive prices on a
retail-minus basis, using cost-plus as a cross-check. It is therefore necessary for us
to consider the methodology that should underpin our retail-minus calculation.
9.60 The OFT considered a number of similar questions in its 2002 investigation into
whether Sky had engaged in a margin squeeze abuse under CA98. Under such an
ex post test for margin squeeze, the focus would be on whether a purchaser that was
as efficient as Sky would be able to retail Core Premium channels on a profitable
basis at the current rate-card price. The OFT examined this question by looking at
Sky’s costs.
9.61 However, as discussed in section 2, the purpose and scope of our sectoral powers
under s316 are different to our powers as a competition authority under CA98. We
identified in section 7 adverse effects on consumers which result, and are likely to
result in future, from Sky’s approach to the wholesale supply of Core Premium
channels. Under s316 we have the power to impose licence conditions to ensure fair
and effective competition, and under s3(1)(b) we have a principal duty to further the
interests of consumers, where appropriate by promoting competition.
9.62 In determining what form of remedy might be appropriate, an ex-post margin
squeeze test may not enable us to take account of entrants’ costs, in particular
issues created by differences in (a) scale between Sky and other retailers (b)
distribution technologies used by other retailers. Having identified competition
concerns around the lack of supply to potential entrants (section 6) and the resulting
consumer detriment (section 7), it is appropriate for us to consider the possible
benefit of a pricing remedy that takes into account differences in scale and in
distribution technology. The key issue becomes the judgement as to what constitutes
530 We would envisage that retailers could still negotiate alternative arrangements with Sky which
could entail an incremental charge to the factory gate price.
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