Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
HD subscribers consistent with those that might be achieved by a ‘large’ entrant (see
paragraph 9.201 below). In determining how average costs grow in the future with
this growth in HD subscribers, it is important to establish the proportion of costs
which vary with subscribers, and the proportion which are fixed costs. There is limited
information with which to judge the proportion of fixed costs. We have assumed that
about 50% of Sky’s year 1 HD retail costs are fixed and around 50% will grow with
subscriber numbers, recognising that a large proportion of current HD retail
expenditure is effectively a fixed cost reflecting the current investment phase in
promoting the HD product. We have, however, considered sensitivities around these
proportions.
9.143 The resulting wholesale price is for a factory gate product which includes HD
versions of Sky’s Core Premium channels but excludes HD versions of basic
channels from Sky or third party providers. Given this is a factory gate product, a
retailer would also incur transmission costs for the HD channels as well as retailing
costs in order to offer the HD retail service. We have assumed DSat transmission
costs in deriving the retail-minus wholesale price, on the basis that these would be
the costs incurred by a retailer as efficient as Sky, and the prospect for offering HD
versions of the Core Premium channels on DTT or IPTV seems more limited in the
short to medium term.
Approach to cost-plus as a cross-check
9.144 As noted at the beginning of this section, we do not propose to adopt a cost-plus
approach as the primary mechanism for deriving wholesale prices given that the
critical asset – content rights – is sold on a regular basis by auction or complex
negotiation, meaning that a cost-plus approach to setting regulated prices could
undermine content values. Nevertheless, we have calculated cost-plus prices as a
cross-check to help ensure that the starting prices that we derive afford a reasonable
return to Sky’s wholesale business given the underlying input costs.
9.145 While in some respects a cost-plus approach avoids many of the practical difficulties
associated with deriving retail-minus prices, for example, the need to tackle issues of
retail bundling, there are nevertheless outstanding questions to address – some of
which we have considered in the context of a retail-minus analysis. In particular:
� How should costs be allocated to wholesale channels?
� Is a multiple year analysis appropriate; over what period and at what discount
rate, and how are costs expected to evolve?
� What is the appropriate size of the total wholesale market to consider?
Allocation of costs to Core Premium wholesale channels
9.146 The majority of costs incurred in supplying Core Premium wholesale channels are
direct costs (e.g. the cost of the rights involved). These costs can vary significantly
between Core Premium products – largely reflecting the different cost of rights for
content within these channels. The significance of the costs of rights acquisition as a
proportion of Sky’s total costs is shown in Figure 63 below. In addition to the direct
costs of rights, there are also common costs which must be allocated to these
wholesale channels in order to derive a cost-plus price.
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