Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
which enables new firms to enter given these higher average total costs at their likely
lower scale. Setting prices purely based on Sky’s own costs would decrease the
likelihood of viable competitors emerging, jeopardising the benefits of wider
distribution and enhanced innovation that the proposed remedy is intended to
produce.
9.126 We need to consider what wholesale price would enable an efficient entrant to put
together a viable business plan. In the interests of competitive neutrality we believe it
is appropriate that we set a single price for a given wholesale product, regardless of
the scale of the prospective retailer. However, there is a degree of judgement as to
what constitutes an ‘efficient’ entrant – setting the threshold high risks low levels of
market entry, and limited competition, whereas setting the threshold low risks high
levels of market entry by inefficient sub-scale firms, the costs of which would
ultimately fall onto consumers. We acknowledge that our approach results in some
duplication of fixed costs – we consider the trade-off between these costs (and the
costs of compliance), with the benefits of greater and freer platform choice, platform
innovation and market expansion, in section 10.
9.127 We assume that the efficient entrant will incur a set level of fixed costs, which is
incurred at each and every level of output. Over and above these fixed costs, the
entrant incurs variable costs, primarily driven by its number of subscribers.
� Assuming a smaller number of subscribers for the efficient entrant results in a
lower wholesale price than for a retail business of Sky’s scale. Average total
retailing costs per subscriber decline as the number of subscribers increases
because of the presence of fixed costs. A small retailer therefore needs a lower
wholesale price in order to compete effectively. The fixed cost assumption is no
different from that applied when we assume Sky’s scale. We have assumed a
single cost curve and only vary where the retailer is on the curve in our
analysis 538 .
� We have generated this fixed cost number by reviewing a range of data relating
to certain cost categories in Sky’s business. These are third party programming,
news and entertainment channels, marketing, subscriber management,
administration and transmission not directly related to channels. We have also
considered data from existing smaller competitors as a reasonable indicator of
the minimum level of fixed cost achievable by an efficient entrant. The majority of
fixed costs arise from marketing expenditure where we have estimated the
minimum required expenditure to allow a competitor to run marketing campaigns
each year.
9.128 Sky described a wholesale must-offer taking into account competitors’ costs as
regulation of a “radical and unprecedented nature” 539 , and also highlighted the fact
that some of the companies that we envisaged would take the wholesale must-offer
were not new entrants, but large companies in their own right.
9.129 The prices that we are setting out for consultation in this document follow a number
of principles which mean that we do not accept Sky’s criticisms.
538 The exception to this approach is in respect of the transmission of premium channels, where under
some pricing scenarios we take DTT rather than DSat transmission costs. We explain this approach
in paragraphs 9.130 to 9.137.
539 section 7 paragraph 6.2 of Sky’s response to our Second Pay TV Consultation
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