Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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result is -£230 million. This negative result is not surprising: it reflects the fact that we
are only considering a relatively short time (five year) frame in that analysis. More
specifically, it reflects the fixed costs of entry that new entrants would incur, and the
subscriber acquisition costs that they will face as they build scale. These are
effectively investments with an expected pay-back of more than five years. Our
pricing calculations explicitly assume a longer time period (effectively, the entrant’s
lifetime) over which we expect producer surplus to be zero. The objective of our
remedy is to enable effective competition from efficient operators that are prepared to
make a substantial investment in pay TV rather than to enable weak entrants to earn
short-term profits at Sky’s expense.
10.66 We also expect those operators to be able to innovate around the wholesale mustoffer
channels and therefore deliver additional value that is not captured in our static
calculation of producer surplus. The dynamic benefits of this potential innovation are
difficult to quantify, but we would expect them to be substantial and significantly
greater than under the counterfactual.
Effect on Sky
10.67 In its response to our Second Pay TV Consultation, Sky argued that “the core of
Ofcom’s proposals for new regulation is the proposal to require Sky to license its
premium sports and film channels to third parties, a proposal that is inherently
confiscatory” 570 . We recognise the risks inherent in intervening in this market, and the
danger that we are seen simply to “confiscate” profits from Sky’s shareholders.
However, we see the effects of our proposed remedy on Sky rather differently. In
particular, we do not think that our proposed remedy is likely to have a substantial
negative impact on Sky’s business. There are two main sets of effects on Sky from
our proposed wholesale must-offer, which we address in turn below:
� First, because we are introducing additional regulation, there are likely to be
administrative and compliance costs associated with Sky implementing a
wholesale must-offer.
� Second, and more substantively, there are the effects on Sky of a reduction in its
wholesale charges and an extension of those wholesale charges to other
operators.
Administrative and compliance costs
10.68 Sky would be likely to incur additional administrative costs following the
implementation of a wholesale must-offer remedy, which would not be incurred under
the counterfactual. It seems these would comprise the costs of dealing with additional
wholesale customers and the costs of ensuring compliance with new regulation.
10.69 The costs of dealing with additional wholesale customers are in essence the costs to
Sky of carrying out negotiations with prospective third party retailers for the
wholesale supply of its Core Premium channels. In our view, a wholesale must-offer
remedy would not contribute significantly to these costs, as Sky has been involved in
wholesale negotiations with prospective third party retailers in recent years, absent
any wholesaling remedy.
570 Sky response section 7, para 3.2.