Pay TV phase three document - Stakeholders - Ofcom

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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. 301
Pay TV phase three document – non-confidential version Figure 64 Table showing range of prices emerging from our calculations (£ per subscriber per month) 0 1 2 NPV=0 at 3 4 5 6 Ofcom 10.4% Large Larger Smaller rate-card Rate-card approxim WACC, Sky’s competit or on competit or on competit or on Cost-plus ation scale, DSat DTT DTT Scenario DSat Sky Sports 1 13.48 11.73 11.24 10.78 10.63 9.41 9.07 Sky Sports 2 13.48 11.73 11.24 10.78 10.63 9.41 3.21 Single channels Single Movies 12.48 10.10 9.61 8.95 8.95 7.58 5.64 Sport- or Sky Sports 1&2 18.39 16.98 16.48 16.00 15.69 14.10 11.34 movies-only bundles Sky Movies Mix 16.59 16.23 15.73 14.83 14.67 12.38 5.64 All channels bundle Sky Sports 1&2 & Sky Movies Mix 23.40 20.94 20.43 19.40 18.90 15.66 16.98 Sky Sports 1 & Single Movies 17.59 16.10 15.59 14.82 14.64 12.69 14.71 Sky Sports 2 & Single Movies 17.59 16.10 15.59 14.82 14.64 12.69 8.85 Sky Sports 1 & Sky Movies Mix 19.80 20.08 19.57 18.56 18.21 15.34 14.72 Sky Sports 2 & Sky Movies Mix 19.80 20.08 19.57 18.56 18.21 15.34 8.85 Other combinations Sky Sports 1&2 & Single Movies 20.60 19.09 18.58 17.78 17.45 15.13 16.98 Weighted average (by Sky’s volumes) 20.72 18.85 18.35 17.51 17.13 14.55 13.57 Notes 1. The scenarios read from left to right, with one assumption changing in each one 2. Scenario 0 is the current cable rate-card 3. Scenarios 1 to 5 are calculated on a retail-minus basis, whereas 6 is calculated on a cost-plus basis 4. 1 uses the OFT’s 1.5% return on turnover approach; 2 to 5 set prices at the level necessary to allow a retailer to achieve NPV of zero over 10 years 5. 1 and 2 assume Sky’s scale, costs and starting asset base; 3 and 4 assume a retailer that achieves 3 million subscribers after 10 years; 5 assumes a retailer that achieves 1 million subscribers after 10 years 6. 1 to 3 assume that the retailer has transmission costs equivalent to Sky on satellite; 4 and 5 assume the retailer has the transmission costs of a DTT platform Analysis of differences in pricing approaches 9.169 Before analysing the differences resulting from these different pricing approaches we set out how the principles and methodology discussed above lead to these wholesale prices. Retail-minus calculations 9.170 The figure below is an example of the retail cost stack for the ‘larger competitor on DTT’ (Scenario 4) for some of the key wholesale products. This shows the reference retail price decomposed into the costs which are deducted (basic content costs, other variable costs and pro-rated fixed costs) and the resulting retail-minus wholesale price. 302
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Pay TV phase three document Propose
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Section 1 1 Summary Pay TV phase th
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Pay TV phase three document - non-c
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(4) In this section— Pay TV phase
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Ofcom’s views Pay TV phase three
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� Annex 3: consultation response
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Content aggregation and market powe
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Respondents’ views 4.36 Sky comme
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Respondents’ views Pay TV phase t
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Our current view Pay TV phase three
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Responses to our consultation Pay T
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Section 5 5 Market power Summary Pa
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Event Total annual value of live ri
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� DTT. � IPTV. Pay TV phase thr
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Production differentiation Pay TV p
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Barriers to entry and expansion Pay
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Section 6 6 Competition issues Summ
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Background Pay TV phase three docum
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Figure 50 Distribution of Setanta p
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[ � ] 376 [ � ] 377 Pay TV phas
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Section 7 7 Consumer effects Summar
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Choice Pay TV phase three document
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Sky Core Premium customers on DSat
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Premium customers on cable Pay TV p
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Distorted choice of bundles Pay TV
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� Whether the firm has market pow
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Cover sheet for response to an Ofco
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