Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
mixes taken. This raises the question: how should we derive a single retail reference
price for Sky Sports 1 from these six different retail prices?
9.82 There are a number of different approaches we could take. For example, we could
simply take the smallest retail package (with the lowest retail price) – i.e. the retail
bundle with only one basic channel mix. This approach would minimise the retail
costs to be deducted from this retail price, arguably leading to the simplest
calculation. However, in reality most consumers purchase significantly more than one
basic channel mix, and so this approach may not be very representative of the retail
price actually paid by Sky’s customers.
9.83 Another, rather more complicated, approach would be to calculate the six wholesale
prices derived from a retail-minus calculation applied to all six different retail prices,
and then to take the lowest of the resulting wholesale prices. This approach would
ensure that other retailers are able to compete with all six retail price points.
However, our aim is to derive a set of wholesale prices which allow other retailers a
comparable retail cost ‘allowance’ to compete in retail markets with a differentiated
set of bundles, rather than to ensure they can compete by offering precisely the
same bundles as Sky, at exactly the same price points.
9.84 A third approach – and the one we have adopted – takes a weighted average of
Sky’s retail prices for different bundles, weighted by the number of Sky’s retail
customers who take that number of basic channels. We consider that this figure
provides the most accurate representation of the retail price paid by Sky’s customers,
and is therefore the best starting point for the retail-minus calculation.
Treatment of packages which include other Core Premium channels
9.85 For each of the Core Premium wholesale products, the methodology described
above identifies a single retail price to act as a reference point for the retail-minus
calculation. This approach takes the focal Core Premium wholesale product and
identifies the retail packages which include this Core Premium wholesale product,
and no other Core Premium channels – in other words, our approach is to take the
‘closest retail product’. For example, if the focal wholesale product is Sky Sports 1,
then our methodology derives the appropriate reference retail price for Sky Sports 1
based on the weighted average of the six retail prices for Sky Sports 1 bundled with
different basic mixes.
9.86 However, it would also be possible to derive a retail-minus price for the focal
wholesale product starting from larger bundles which include other Core Premium
channels. For example, there are a number of other retail packages which include
Sky Sports 1 which could be used as the starting point for the retail-minus
calculation. These retail packages include other Core Premium channels – notably
retail packages which include Sky Sports 2 as well as Sky Sports 1, and retail
packages which include Sky’s movie channels as well as Sky Sports 1.
9.87 Our objective is to address the effects on consumers identified in section 7 by
providing other retailers access to Sky’s Core Premium channels at prices which
enable them to compete with Sky’s retail offerings. In this context, we believe that the
approach of taking the closest retail product is the appropriate starting point. For
example, by construction, our retail-minus calculation should allow a competing
retailer to offer Sky Sports 1 at retail prices which are competitive with Sky’s retail
packages which include Sky Sports 1 and no other Core Premium channels.
Similarly, a competing retailer should be able to offer Sky Sports 1&2 at prices which
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