Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
of Sky Sports 3 and Sky Sports Xtra to be deducted. This is because we do not
include Sky Sports 3 and Sky Sports Xtra as part of any of our proposed wholesale
products although they are included as bonus channels in the retail packages
containing Sky Sports 1&2. We have approached this adjustment based on the costs
of sports rights and channel production allocated to Sky Sports 3 and Sky Sports Xtra
(see paragraphs 9.146 to 9.152).
9.107 In principle a deduction should also be made for the costs of Sky Movies Classics
from the relevant reference retail prices given that this channel is not included in any
of the wholesale products. However, we have not made an adjustment for this single
movie channel as any effect on wholesale charges is likely to be immaterial. This is
because Classics predominately exploits library rights, which are relatively
inexpensive, and has comparatively low viewing figures, so would only be allocated a
small share of relevant costs.
Single year vs. multiple year analysis
9.108 Having established the starting retail prices and the costs to be deducted, there are
still a number of key methodological issues to be considered before implementing a
retail-minus calculation. Firstly, should the calculation be on the basis of a single year
or a multiple year analysis?
9.109 Our objective is to derive wholesale prices which can address the concerns identified
in sections 6 and 7. We have therefore considered what prices might be appropriate
for an efficient entrant in order for it to be able to compete with Sky’s retail prices. In
this context it is appropriate to consider an analysis over a period of time, to
determine whether there is a credible business case for entry, rather than for a single
year. This is particularly the case given the likely growth profile of an efficient entrant
– a single year analysis is unlikely to be representative.
9.110 A discounted cashflow (DCF) analysis is a standard approach to examining a
business case over a period of time. We therefore propose to use a DCF analysis as
a way of reflecting the likely business model of a retailer taking Sky’s wholesale
channels. For our retail-minus calculations we have modelled cashflows over a
period of ten years at the end of which we include a terminal value reflecting the
ongoing value of the business. This reflects assumed growth in subscriber numbers
over the first nine years of the analysis after which we assume a steady state for the
purposes of the terminal value calculation.
9.111 The inclusion of a terminal value implies that the retail business of the efficient
entrant retains value into the future. After ten years, we would expect the entrant to
have established a brand and subscriber base, through which it can expect to earn
positive cashflows in future periods. We have calculated a terminal value on the
basis of forecasted future cashflows. We considered calculating the terminal value on
the basis of the residual value of tangible and intangible assets; correctly derived,
this would be the same as the value of future cashflows. However, we considered
that forecasting future cashflows directly was likely to produce a more accurate
estimate of future value.
9.112 In calculating wholesale charges, the entrant’s expected per-subscriber cashflows,
including a terminal value, are discounted using a rate set equal to an estimate of the
cost of capital. The wholesale charge for each Core Premium wholesale product is
then set such that the additional costs from wholesale charges take the net present
value (NPV) of the entrant’s cashflows to zero. That is, the NPV of retail revenues,
retail costs and wholesale charges is sufficient for the entrant to break even. Our
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