Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
identify the parts of Sky’s businesses that these costs should be allocated to in
contrast with other categories such as marketing.
� Administration costs: a retailer will also incur costs in the general administration
of its retail business. These costs include corporate finance, communications and
human resources functions. Sky’s administration costs are largely common
across its entire business.
9.101 Sky’s management accounts relate to its wholesale, retail, and platform functions,
and therefore it is necessary to allocate the above cost categories across these
businesses, as well as to further sub-divisions. The key parts of the business that we
have allocated costs to and the methodology we have used to allocate common
costs, are:
� Wholesale, retail and platform: we have allocated common costs based on the
number of customers served by each function where: for wholesale this is the
number of premium customers served by Sky and Virgin Media; for retail this is
the total number of subscribers to Sky’s retail packages on DSat and ‘Sky by
Wire’; and for platform, this is the total number of customers on Sky’s DSat
platform. Marketing expenditure is a substantial category which in some cases
may be a common cost across different parts of Sky’s functions. If an individual
expense primarily benefits Sky’s retail business, it is appropriate that this cost is
allocated entirely to the retail business. However, if the expense promotes Sky’s
brand more generally, including the Sky Sports and Sky Movies brands, this can
in part be expected to benefit all retailers of Sky’s premium channels. In this case
we would allocate a portion of costs to Sky’s wholesale business, on the basis of
the number of customers served, for recovery through wholesale charges for
premium channels.
� UK and Ireland subscribers: Sky’s management accounts relate to both countries
and we have allocated common costs based on the number of customers served
by Sky in each of the two countries.
� Residential and commercial subscribers: we have allocated common costs for
premium sports on the basis of revenue, acknowledging that one individual
commercial subscriber has a much higher value than a residential subscriber.
� Basic and premium packages: we have taken a pragmatic approach and
allocated common costs on the basis of ‘subscriber product units’ as a measure
of value – where a subscriber taking only ‘basic’ is measured as one unit and a
subscriber taking ‘basic + premium’ is measured as two product units. Other
alternative methods would be to allocate costs purely on the basis of subscriber
numbers, or purely on the basis of revenue. Allocating on the basis of subscriber
numbers would tend to over-allocate costs to basic; for example, marketing costs
are likely to be disproportionately targeted at premium customers, given the
higher likely return on marketing expenditure. Other costs may at least at first
glance seem better suited to allocations by subscriber numbers – subscriber
management, for example. However, even in this example we might expect some
greater effort to be spent on higher-value subscribers, making the correlation less
clear. It might also be argued that we should allocate costs differently for each
individual cost category or cost item. However, the lack of clear correlation
between particular cost categories and appropriate methods of allocation
suggests that overall, although we would not claim that using subscriber units is
perfect, it is an appropriate way of allocating common costs.
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