Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
9.149 In the context of a cost-plus cross-check, Virgin Media argued that accounting
separation between Sky’s different businesses would be required to allow verification
of the information submitted by Sky 545 . We are confident that the data we have
analysed is sufficiently robust for our purposes and we describe our approach to cost
allocation below. Furthermore, we have considered the impact of key parameters
through sensitivity analysis (see paragraphs 9.178 to 9.183). We do not believe that
imposing accounting separation obligations would be a significant benefit to our
process.
9.150 As for our retail-minus approach, in analysing Sky’s costs, it is necessary to allocate
costs between different aspects of Sky’s businesses. The key categories which
determine wholesale channel costs are:
� Wholesale, retail and platform businesses: we have allocated common costs
based on the number of customers served by each function.
� UK and Ireland subscribers: we have allocated common costs based on the
number of customers served by Sky in each of the two countries.
� Residential and commercial subscribers: we have allocated common costs for
premium sports between residential and commercial subscribers on the basis of
revenue.
� Basic and premium packages: we have allocated common costs on the basis of
‘subscriber product units’ as a measure of value – as described in paragraph
9.101.
� 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.
9.151 Having established the costs which are relevant to the Core Premium channels as a
whole, we then need to determine how these costs should be allocated to individual
Core Premium channels. The majority of these costs are the programming costs of
sports and movie rights. Our approach differs for sports and movie channels
reflecting the different way in which these rights costs are incurred. In general, we
consider the correct approach is to allocate rights costs to channels according to their
value to customers. However, for movie rights costs, because of the structure of
Sky’s agreements with the movie studios, we take a different approach. In more
detail:
� For sports channels, the principle we have adopted is that fees allocated to
channels should reflect consumers’ perceived value of the content on each
channel. We have examined Sky’s current sports contracts with rights-holders
and related sources and have allocated these rights costs between Sky’s sports
channels on the basis of a detailed analysis of channel listings and programme
audiences, using viewer share data from the Broadcasters’ Audience Research
Board (BARB) for 2008. For example, FAPL content is predominantly allocated to
Sky Sports 1, much less to Sky Sports 2 and none to Sky Sports 3 and Sky
Sports Xtra, reflecting Sky’s programming choices and viewers’ behaviour.
Across a full portfolio of different sports, we would not see viewing share as a
good proxy for value, since the duration and frequency of different events and
545 Section 6, paragraph 6.32 of Virgin Media’s response to our Second Pay TV Consultation
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