Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
interventions could stifle innovation. This risk to innovation is likely to be significantly
higher for interventions in content markets, where the intervention may determine
which products are developed for consumers, than for downstream interventions
such as our proposed wholesale must-offer obligation, which are intended only to
guard against the restricted distribution of these products.
12.21 However, in this particular instance there appears to be a risk that innovation in the
development of VoD services may be stifled by the manner in which the VoD rights to
premium movies are currently being exploited. This suggests that there may be a
case, in this specific instance, for targeted intervention.
12.22 Additionally, we have already set out a concern relating to high margins within Sky’s
wholesale business. This is based both on the profitability analysis carried out by
Oxera (see Section 6) and our own pricing analysis, which shows a significant gap
between retail-minus and cost-plus prices (see section 9). Our view, particularly in
light of our pricing analysis, is that the evidence of high margins is stronger for Sky’s
movie channels than its sports channels.
12.23 Both of these concerns could in principle be addressed by making the SVoD rights
available separately to the linear subscription rights.
12.24 As we set out in section 4 on market definition, an SVoD service would be likely to be
a closer substitute for the linear service than the current closest substitute, which is
pay per view. Depending on the identity of the company that licensed the rights, it
could therefore provide an increased constraint on wholesale margins, thereby
offering the possibility of addressing remaining concerns about high wholesale
margins on movies. Making the SVoD rights available transparently and separately
from the linear rights could allow other companies, perhaps with greater abilities or
willingness to exploit them than Sky, to get hold of the rights and establish services
which could potentially appeal to consumers.
12.25 This is a form of remedy that could be investigated by the CC following a market
investigation reference under EA02. In order to make such a reference we would
need to have a reasonable suspicion that there are features of the market which
prevent, restrict or distort competition. We identified a number of characteristics of
the market in our discussion of the structure of the market in section 3. These
characteristics, which we set out again here, not only underpin the competition
concerns that bring us to our proposed wholesale must-offer, but are relevant as
features of the market that we reasonably suspect of preventing, restricting or
distorting competition:
� Consumer preferences for content, and the particular importance of premium
content as a driver of pay TV subscriptions.
� Content aggregation and the potential creation of market power.
� Fixed content production costs and the importance of price discrimination.
� Vertical integration of firms which are active in the market and the incentives this
creates.
12.26 In particular, content aggregation is important. We can see aggregation taking place
through Sky purchasing the rights to the output from all six Major Hollywood Studios,
thereby acting as a critical step in the creation of market power, which is the enabler
for high wholesale margins. Aggregation also takes place in the form of different
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