Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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� Premium sports and premium movies: we have allocated common costs between
these two categories on the basis of the total number of subscribers taking each
product.
� SD and HD services: we have allocated common costs primarily on the basis of
Sky’s revenue from SD and HD services respectively. In addition, we note that
set-top box subsidies are likely to be higher for HD which may argue for a higher
allocation of common costs to HD in this particular sub-category.
9.102 To provide some more specific examples:
� A Sky-wide cost such as Sky’s central finance team is allocated to all parts of
Sky’s business in each market in proportion to the number of subscribers served
by each function.
� Certain marketing expenses for the Sky One channel are assumed to be
common between Sky’s basic wholesale business and its retail business, and
these are also allocated in proportion to number of subscribers served by each
function.
� Third party programming costs are assumed to relate only to retail, but are
allocated between the UK and Ireland (by number of subscribers), between
residential and commercial subscribers (by revenue) and between SD and HD
subscriptions (primarily by revenue).
Specific costs deducted from retail prices
9.103 As noted above, at the broadest level the costs to be deducted from the reference
retail prices are basic content costs and retailing costs. There are specific points to
address in the treatment of basic content costs.
9.104 We have first deducted the costs associated with basic channels – both the direct
costs (the per subscriber charges for third-party channels), and the implied charges
for Sky’s owned channels. We have also deducted an allocation of common costs to
basic, with allocations carried out as set out earlier in this section. Our approach to
calculating the costs of basic channels associated with different retail packages is
consistent with our approach to calculating revenues from basic channels, used to
establish the starting reference retail prices.
9.105 We recognise that retail competitors may face higher carriage fees than Sky for third
party basic channels, on account of weaker buyer power. This weaker buyer power
may also extend to acquiring other inputs such as customer equipment. While such
weaker buyer power may arise as a result of smaller scale, our aim is to enable other
retailers to have a similar retail cost ‘allowance’ to compete with Sky’s retail
packages by including their own proposition (whether basic channels or other
services) rather than to replicate Sky’s retail bundles with precisely the same basic
channels and services. Alternative retailers have the opportunity to include other
basic channels or services in their competing retail packages, and for some products
they may have cost advantages in comparison to Sky. There is a separate issue
where lower scale may result in unavoidable higher costs for an efficient entrant, for
example if the average cost of retailing the Core Premium channels is higher due to
the presence of fixed costs. We address this issue in paragraphs 9.124 to 9.129.
9.106 A similar issue to the deduction of basic content costs arises in the case of deriving
prices for wholesale products which include Sky Sports 1&2, which requires the costs