Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
9.190 In contrast, Scenario 5, which reflects the scale of a ‘small’ entrant on DTT, as
opposed to a ‘large’ entrant in Scenario 4, is a more significant difference with retailminus
prices about 10-17% lower using this assumption.
9.191 Finally, Scenario 6 sets out the cost-plus wholesale prices that we believe are
appropriate to allow a reasonable return. In general (as reflected by the weighted
average wholesale charge across wholesale products) the retail-minus approaches
generate prices above the cost-plus figures. However, this is not true for all
wholesale products – for example the retail-minus wholesale prices for a ‘small’
entrant are below the cost-plus figures for a number of wholesale products. This
implies that the wholesale prices necessary to afford ‘small’ entrants on DTT the
opportunity to compete with Sky’s retail prices, would not necessarily permit a
reasonable return on the investment in rights.
Range of wholesale prices for SD for consultation
9.192 Under our preferred option to set prices for a wholesale must-offer, we have selected
a range of prices based on Scenarios 2 to 5 in Figure 64.
9.193 We have excluded Scenario 1 (setting prices on the basis of 1.5% return on turnover)
from our range of prices for consultation. As we have previously discussed, the
approach we have taken is based on allowing an appropriate economic return. We
believe that this is best determined by identifying discounted future cashflows at a
suitable cost of capital. It is much harder to identify the appropriate benchmark for a
return on turnover approach. Furthermore, on the basis of comparators that we have
identified, there is reason to believe that a ROT of 1.5% would be too low a
benchmark in the context of ensuring fair and effective competition 551 .
9.194 We recognise that there are arguments for excluding Scenario 2 given our aim to
address restricted availability of Core Premium channels, and our view that it is
unlikely to be reasonable to expect an efficient entrant to achieve Sky’s scale.
Nevertheless, while the principle we have adopted is that it is reasonable to consider
an efficient entrant with smaller scale than Sky, the degree of adjustment made for
scale is an important question for consultation. We have therefore included Scenario
2 at the upper end of our range of prices for consultation.
9.195 Likewise, we recognise that Scenario 3, which is based on DSat transmission, may
not facilitate entry by competitors using alternative platforms with higher costs such
as DTT, at least not without recourse to other efficiencies, such as those gained
through retail bundling with other products. However, in the context of presenting a
range of prices for consultation, we believe there is value in including prices which
are based on DSat transmission costs, since this benchmark would reflect a
competing retailer who is as efficient as Sky in this respect.
9.196 In principle, we have also excluded the cost-plus figures from our range for
consultation. As we set out in the previous section, while the cost-plus figures are a
helpful check, there is one major issue with a cost-plus wholesale must-offer: costplus
prices would be likely to have a detrimental effect on rights auctions and
negotiations. However, in practice, we believe it is appropriate for these figures to
serve as a floor on prices, in order to ensure that Sky recovers its efficiently incurred
costs (including a reasonable return).
551 [ � ].
308