Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
10.70 The costs to Sky of ensuring compliance with a wholesale must-offer remedy appear
to be fairly limited, given that in terms of delivery, Sky would not be required to
provide a new wholesale product. Its only obligation would be to ensure that the Core
Premium channels were made available to retail competitors at its premises
(although Sky and competitors may agree to alternative delivery methods).
10.71 Whilst it is envisaged that administrative processes to audit subscriber numbers and
compliance with security requirements will be required for each retailer, these are
expected to be similar to those already in place in relation to wholesale supply to
Virgin Media and the retail relationship with Tiscali.
Reduced wholesale prices and wider availability of Sky’s content
10.72 The more substantive issue is the direct effect of our proposed remedy on Sky’s
wholesale and retail businesses. There are likely to be several static effects of our
proposed wholesale prices on Sky:
� Sky will earn lower wholesale revenues from its existing wholesale subscribers.
� Sky will earn new wholesale revenues on additional wholesale subscribers.
� To the extent that Sky’s retail subscribers switch to other retailers, Sky will
sacrifice retail margin.
10.73 We have considered these effects in our quantitative analysis. Under our central
case, the overall effect on Sky over five years is positive: compared with the
counterfactual, Sky’s producer surplus increases by around £240 million (including
the effect on advertising revenues). In our worst case for Sky, its producer surplus
over five years decreases by around £250 million, and in our high case increases by
£610 million. This static analysis is consistent with our vertical arithmetic calculations
in section 6, which suggests that Sky has a static incentive to supply others even at
wholesale prices well below current rate-card prices.
10.74 There is, of course, uncertainty around these numbers. However, even though our
worst case results in a negative producer surplus for Sky, we do not consider our
proposed intervention to be disproportionate. As we set out in section 6, we believe
Sky to be making returns on its pay TV business that are well above its cost of
capital. In light of this, and in light of the fact that we are not proposing to bring
wholesale prices down as far as the cost-plus figures, we believe that the decrease in
wholesale prices that we are proposing could at most decrease the high margins that
Sky is making, rather than putting its wholesale business into loss-making territory.
Effect on rights holders
10.75 We also need to consider the potential for the wholesale must-offer remedy to impact
on rights holders, and any further indirect impact on consumers.
10.76 Respondents to our Second Pay TV Consultation highlighted this as a risk. In
particular, the FAPL warned that the imposition of wholesale pricing obligations could
risk distorting the upstream content rights market. It would in turn give rise to a
diminution in value of the FAPL's rights which would also damage football as a
whole. The BBC, despite agreeing in general with the approach of a wholesale mustoffer
remedy, highlighted the risk that it might reduce the incentive of companies to
compete for rights upstream.
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