Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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an ‘efficient’ entrant, acknowledging the trade-off between the dynamic benefits of
entry and competition, and the static costs of inefficient entry.
9.63 The approach we have adopted is to derive prices on a retail-minus basis for an
efficient entrant looking to retail Core Premium channels. The efficient entrant is
hypothetical – we do not focus on a particular potential or existing retail competitor to
Sky. Our concept of ‘entrant’ is a potential or existing retailer who does not currently
offer Core Premium channels, but might well be offering other retail services,
including other pay TV services.
9.64 The general principle of a retail-minus approach is to derive wholesale prices by
asking: ‘how much could an efficient entrant afford to pay for the wholesale channels
after taking into account all of its other costs and the need to earn a return on its
investment?’ The resulting wholesale prices should be at a level which allows the
efficient entrant to compete with Sky in retail markets, providing similar products at
similar prices. That is not to say we would expect or desire competitors to adopt
identical business models to Sky, but rather that there should be a comparable retail
cost ‘allowance’ for others to compete in retail markets. For example, the cost
allowance might be used to subsidise set-top boxes or license basic channels
(following a similar business model to Sky), to package Core Premium channels
alongside new services, or to retail unbundled packages at a lower price point. Our
intention would be to facilitate diversity in business models and product offerings in
order to provide greater choice to consumers.
9.65 In addition to this retail-minus calculation, adopting a cost-plus cross-check ensures
that our proposed approach would enable Sky to recover the costs it efficiently incurs
in the provision of its Core Premium wholesale channels.
9.66 For the retail-minus calculation, at this most fundamental level there are therefore
two key questions:
� What retail prices should we start from?
� What costs should we deduct from the reference retail price?
9.67 Both these questions raise further methodological issues in calculating retail-minus
wholesale prices. In particular:
� Should we adopt a single year or a multiple year analysis?
� How should we allow for an appropriate return?
� What is a reasonable scale to consider for the efficient entrant?
� How should we deal with differences in the costs of alternative distribution
technologies?
9.68 We have also considered separately how to derive wholesale prices for HD versions
of the Core Premium channels on a retail-minus basis, given Sky’s current retail
pricing structure (see paragraphs 9.138 to 9.143).
Retail prices as the starting point of the calculation
9.69 The first step of the retail-minus calculation is to derive a retail price for each of the
11 Core Premium wholesale products identified in the list in paragraph 9.22. This