Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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� Our use of competitors’ scale for our modelling attempts to reflect what Sky’s
costs would be at a smaller scale than it has now. It is indeed the case that some
of the companies that might take up the wholesale must-offer are large in their
own right – BT, Virgin Media and Orange for example. However, such
companies, large or not, are in no position to take a product at a price which is
uneconomic at the sort of scale they are likely to achieve in their pay TV
businesses over a plausible planning horizon. We therefore consider this
approach is appropriate for ensuring fair and effective competition.
� We have adopted similar principles in fulfilling our duties to promote competition
within the telecoms framework. Most key prices within that framework are set on
a cost-plus basis, so the question does not arise, but in those cases where we
have set retail-minus prices (in particular, in setting prices for wholesale bitstream
broadband access products 540 ) we have used the costs of an efficient new
entrant.
� In any event, our approach of incorporating a cost-plus cross-check is designed
to ensure that Sky is able to earn a reasonable return, at least equal to its cost of
capital, on its wholesale Core Premium channels 541 . We explicitly avoid setting
any prices that do not satisfy this condition.
Allowance for transmission costs
9.130 As previously noted, we have taken account of responses regarding the principle of
technology-neutrality and propose to adopt an approach which sets a single price,
applicable to all competing retailers, for a given factory gate product which excludes
onward transmission to retail customers. The retail-minus price for the factory gate
product must therefore incorporate an allowance for the costs of transmission (in
addition to the costs of retailing). In practice, deriving a set of retail-minus prices
which is consistent with such a technology-neutral principle presents challenges
given that different distribution technologies entail different transmission costs.
9.131 Our starting point for establishing the likely costs of an efficient entrant has been to
look at Sky’s own costs on its satellite platform. However, as in the case of the
entrant retailer’s scale (discussed above), there are good reasons to consider
deviating from Sky’s own costs when it comes to transmission costs.
9.132 There are four different distribution technologies which can be used to deliver
standard definition pay TV services to the home, all with quite different cost
structures:
� DSat (digital satellite): which reflects Sky’s own costs and is therefore an
important proxy for efficient entry. There is also the possibility of offering pay TV
services on new satellite platforms (e.g. Freesat).
540 Direction Setting the Margin between IPStream and ATM interconnection Prices, 26 August 2004,
http://www.ofcom.org.uk/consult/condocs/adsl_price/statement/statement.pdf.
541 If it were not for the significant risk of a detrimental impact on the value of rights, it may have been
more appropriate to derive wholesale prices directly on a cost-plus basis which would avoid the
issues that Sky raises about taking account of competitors’ costs. In other words, the issue of
competitors’ costs only arises because we have had to adopt a retail-minus approach to work
‘backwards’, deriving wholesale prices from Sky’s retail prices, in the absence of a cost-plus
methodology being workable.