Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
within 10% of the rate-card. However, there are some larger differences on a product
by product basis – for example, Sky Sports 1 is almost 13% lower under Scenario 1
while Sky Sports 1 & Movies Mix is about 2% higher under Scenario 1. The OFT’s
test was carried out on an aggregate basis, not based on individual packages,
whereas we have worked out the prices on a package by package basis. Sky could
remain consistent with this aggregate test and still price particular wholesale products
higher or lower.
9.186 We have faced uncertainties in establishing precisely how Sky sets its wholesale
prices, particularly in the absence of the modelling that Sky uses to cross-check its
prices against the OFT’s test 550 . The discrepancies observed between the figures we
have derived under Scenario 1 and the existing rate-card (Scenario 0) may be
explained by the following:
� We present wholesale prices for 2009/10, whereas Sky’s rate-card applies in
2008/09. We have adjusted charges for forecasted RPI inflation of -1.5%, so we
would expect our charges to be commensurately lower. This has a small but
significant effect;
� We have adjusted wholesale charges for packages including both Sky Sports 1 &
2 to reflect the absence of Sky Sports 3 from the wholesale product. Therefore,
an implied price for Sky Sports 3 is included within the wholesale rate-card, but
not our wholesale charges. This again has a small but significant effect;
� Sky’s business has changed substantially since the OFT’s margin squeeze
investigation concluded in 2002, including the launch of new products such as
Multiroom and HD. Our treatment of related revenues and costs may differ from
that of Sky;
� While we have adopted different approaches to allocating common costs in
certain cases, we believe the net effect of these differences is unlikely to lead to
large differences in wholesale prices.
9.187 Scenario 2, which reflects the incorporation of a return on investment at our estimate
of 10.3% for Sky’s cost of capital, as opposed to a return on turnover of 1.5% in
Scenario 1, results in lower retail-minus figures than Scenario 1, on average by about
50p, or 3%.
9.188 Similarly, Scenario 3, which reflects the scale of a ‘large’ entrant, as opposed to
Sky’s scale in Scenario 2, also results in consistently lower retail-minus figures than
Scenario 2 by about 3-7%.
9.189 Scenario 4 shows the impact of making an allowance for DTT distribution costs
compared to DSat transmission costs, as incurred by Sky (Scenario 3). As the figures
show, the use of DTT distribution costs does not make a significant difference when
compared with DSat costs – a difference of between about 0% and 3%. Hence any
benefit afforded to a competitor using a more efficient distribution technology is likely
to be very small in practice.
550
We requested Sky’s modelling in question 6 of our formal information request of 12 November
2008. [ � ].
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