Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
ensure compliance with its interpretation of the margin squeeze test applied by
the OFT 547 .
� Scenario 1: applies a discount rate to future cashflows so as to obtain a ROT of
1.5%, the figure adopted by the OFT in its ex post margin squeeze test. Scenario
1 is therefore essentially our approximation of the OFT methodology, using Sky’s
current costs.
� Scenario 2: applies a discount rate of 10.3% to the retailer’s future cashflows,
which is our estimate of Sky’s cost of capital. We base this scenario on a retail
business approximating to Sky’s business – with Sky’s costs (including DSat
transmission costs), Sky’s retail prices and Sky’s opening asset base at the start
of the period. We include a figure for intangible assets for Sky, based on the cost
of acquiring subscribers at the start of the period. We also include a terminal
value based on an estimate of future cashflows.
� Scenario 3: still applies a discount rate of 10.3%, but reflects the scale of a likely
‘large’ entrant, assuming a subscriber base of three million after 10 years. We
assume that each competitor incurs fixed retailing costs of about £[ � ] million
per year (including transmission of premium content over DSat) 548 .
� Scenario 4: is the same as Scenario 3, but makes an allowance for DTT
transmission costs, as DTT is the most likely technology for potential competitors
to use in the short to medium term, and the technology which is most likely to
yield the greatest number of additional subscribers. Here we assume that each
competitor incurs fixed retailing costs of about £[ � ] million per year (including
transmission of premium content over DTT) 549 .
� Scenario 5: is the same as Scenario 4, but reflects the scale of a likely ‘small’
entrant and assumes a smaller subscriber base of one million after 10 years.
Again we assume that each competitor incurs fixed retailing costs of about £[ � ]
million per year (including transmission of premium content over DTT).
� Scenario 6: is calculated on a cost-plus basis, using a NPV approach assuming a
cost of capital of 10.3%.
9.168 The table below shows a range of prices that have emerged from our analysis, based
on these different pricing scenarios. The final row of the table presents a weighted
average of these prices, weighted by the number of Sky’s retail subscribers
purchasing each of these packages, which gives a broad aggregate measure with
which to compare the different pricing approaches.
547
This is to the best of our understanding given that Sky declined to provide us with its calculations
as noted in paragraph 9.122.
548 Assuming fixed premium transmission costs for DSat of £[ � ]m.
549 For the purposes of deriving an estimate of premium transmission costs we take an estimated cost
of £[ � ]m per videostream. However, we assume that this is spread amongst retailers using
videostream sharing and simulcrypt arrangements, resulting in a per-retailer fixed cost of £[ � ]m.
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