Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
Prices for other retailers
10.55 The entry of new retailers to the market for Core Premium channels is likely, over
time, to increase the competitive intensity of that market. However, in the short term,
we would not necessarily expect these retailers to offer lower retail prices than those
currently available. Indeed our quantitative analysis assumes that retail prices will be
closely linked to Sky’s current prices. Nonetheless, if alternative retailers are able to
innovate on the basis of access to premium content, then in time we would see the
prospect for a wider range of other offerings, potentially including lower priced
packages.
Effect on retailers of pay TV services
10.56 We would expect a wholesale must-offer remedy to affect both those firms that would
take advantage of such a remedy and Sky. We address these in turn.
Effect on firms that would take advantage of a wholesale must-offer remedy
10.57 As we set out in section 3, the Core Premium channels are of major importance in
driving pay TV subscriptions. As we further set out in section 8, ensuring access to
these channels would allow firms other than Sky to compete more effectively in the
retail market than in the counterfactual.
10.58 This would benefit new competitors in premium pay TV in terms of allowing them to
achieve scale more quickly and being more able to attract subscribers, making them
more able to progress other aspects of their business, such as the products they
might seek to package with premium channels.
Duplication of fixed costs
10.59 We would expect new entry in the market for the supply of retail television bundles
containing Core Premium Sports and Movies channels to be possible based on the
charges in the range specified under a wholesale must-offer remedy. This is what
drives the market expansion we discuss above. However, this expansion does not
come without costs. We proposed in our discussion of pricing to set prices in such a
way as to allow operators with smaller subscriber bases than Sky to put together
viable businesses in pay TV using Core Premium channels. One consequence of this
is we are likely to facilitate a modest duplication of fixed costs across the sector.
Under the counterfactual, these duplicated costs would not exist.
10.60 While adding to the fixed costs of an industry is an undesirable consequence of any
regulatory intervention, it is the level of those costs in relation to the benefits of
intervention that is relevant. For the purposes of our impact assessment, we
therefore need to determine the magnitude of the fixed costs that are likely to be
incurred by new entrants over and above the fixed costs that would be incurred by
Sky and Virgin Media if they remained the only retailers of Sky’s Core Premium
channels.
10.61 Having assessed benchmarks from existing operators, we consider that each new
entrant in the markets for the supply of retail packages containing Core Premium
channels would be likely to incur additional fixed costs of about £9 million. These
fixed costs are over and above those incurred in retailing basic-only packages, which
we estimate to be around £3 million, resulting in a total fixed cost of about £12
million. Two thirds of these costs are likely to consist of marketing costs, where we
have assessed the minimum expenditure necessary to mount an effective campaign.
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