Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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are competitive with Sky’s retail packages which include Sky Sports 1&2 and no
other Core Premium channels.
9.88 This principle is worth contrasting with our position on basic channels included in the
retail bundle. We expect other products, notably basic channels, to be more readily
available. We therefore do not believe it is appropriate for regulation to facilitate other
retailers replicating Sky’s basic bundles precisely, at exactly the same price points,
as opposed to bundling alternative basic channels or other services in order to create
differentiated retail products. In contrast, there is no credible competitive alternative
to Sky’s Core Premium channels, and hence we believe that competitors should be
enabled to replicate each of Sky’s Core Premium bundles. By setting a price for the
Core Premium wholesale product corresponding to each of Sky’s Core Premium
retail bundles, with a sufficient margin, an efficient entrant should be able to compete
with these retail products. We therefore believe that our approach of taking the
closest retail product for each Core Premium wholesale product is appropriate.
9.89 A concern could arise in practice if Sky’s retail prices were set not with consumer
demand and consumer preferences in mind, but with a view to manipulating the
resulting regulated wholesale prices. For example, in paragraph 9.40 above, we
describe an example where there may be an incentive to increase the price of retail
packages which contain Sky Sports 1 (but no other Core Premium channels) relative
to larger retail bundles containing Sky Sports 1&2 to the potential detriment of
competing retailers who are attempting to differentiate themselves by focussing on
smaller retail packages.
9.90 We believe that our approach to how regulated wholesale prices should change over
time (see paragraphs 9.36 to 9.51) will help to address this type of concern in the
future. However, we note there is an incentive for Sky to change its current retail
prices ahead of any wholesale must-offer obligations coming into force. One way to
address this concern would be to determine wholesale prices on the basis of retail
prices effective at the time of this consultation. In addition, we have considered the
likely prices that would result for wholesale products (e.g. Sky Sports 1) starting with
retail packages containing larger bundles of Core Premium channels (e.g. Sky Sports
1&2) and the appropriate adjustments to deduct the cost of the additional Core
Premium channels (e.g. Sky Sports 2). In cases where this leads to a significant
discrepancy in the wholesale price from the more direct approach described above,
we consider whether further adjustments should be made (see paragraph 9.171).
Relevant costs to be deducted
9.91 Having identified an appropriate reference retail price for each Core Premium
wholesale product we need to identify the corresponding costs that should be
deducted in order to derive the retail-minus wholesale price.
9.92 Since the retail bundles that form the basis of our retail-minus calculation include
both the Core Premium channels for which we wish to set a wholesale price, as well
as basic channels, there are two broad steps:
� Deduct the costs associated with the bundled basic channels;
� Deduct the costs associated with retailing the Core Premium channel product.
9.93 However, we first need to consider:
i) Which type of costs should be deducted?