Pay TV phase three document - Stakeholders - Ofcom

Section 10
Pay TV phase three document – non-confidential version
10 Proportionality of a wholesale must-offer
remedy
Summary
10.1 We have compared the impact of a wholesale must-offer remedy against the
counterfactual from several different perspectives:
10.2 Consumers would benefit from greater and freer platform choice, increased platform
innovation, plus market expansion effects. A static analysis suggests an increase in
consumer surplus over five years of around £370 million according to our central
estimate, though this estimate is subject to a degree of uncertainty 557 . We would
expect additional dynamic benefits, due to retail and platform innovation. The effects
of these are difficult to quantify, but we attach particular importance to the dynamic
benefits to consumers associated with the effective exploitation of new distribution
technologies, notably IPTV.
10.3 Retailers other than Sky would benefit from access to Core Premium channels, and
be able to develop new and innovative products based on this access. Again, the
dynamic benefits which we expect to arise from this innovation are difficult to
quantify, but should be significant. They would however be partially offset by the
duplication of fixed costs incurred during market entry. According to our static
analysis, this duplication of fixed costs, together with subscriber acquisition costs as
rival retailers build their subscriber bases, may result in a negative producer surplus
over a five year period. This is unsurprising, reflecting the fact that our pricing
analysis assumes a longer pay-back period, and that this assessment does not take
account of other services and propositions we would expect these providers to offer.
Our objective is to enable effective competition from efficient operators that are
prepared to make a substantial long-term investment in pay TV, not to enable weak
entrants to earn short-term profits at Sky’s expense.
10.4 Sky would be subject to new regulation, and the associated administrative and
compliance costs. It could also be subject to a reduction in its wholesale charges to
cable and an extension of those wholesale charges to other operators. However, we
expect these effects to be more than offset by additional wholesale revenues
associated with market expansion. Sky’s five-year producer surplus increases by
around £240 million under our central estimate. In our low case, its producer surplus
decreases by around £250 million, and in our high case it increases by £610 million.
The proposition that our proposed intervention is beneficial for Sky, at least on a
static analysis, may appear surprising, but it is consistent with our conclusion in
section 6 that Sky has a static incentive to supply others even at wholesale prices
well below current rate-card prices.
10.5 Rights-holders might be affected if there were a reduction in the level of wholesale
revenue available to pay for rights, or if there was a major change in the incentives
faced by bidders. We have considered the likely effect of a wholesale must-offer on
the willingness to pay for upstream sports and movies rights of Sky and of other
557 This figure – and all consumer and producer surplus figures presented in this section – is a 5 year
NPV result derived using a social discount rate of 3.5%.
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