Pay TV phase three document - Stakeholders - Ofcom

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� Annex 3: consultation response cover sheet. � Annex 4: summary of consultation questions. � Annex 5: glossary of terms used in this document. Pay TV phase three document – non-confidential version 2.71 There are a number of separate annexes to the document, which set out the details of particular parts of our analysis. These are as follows: � Annex 6: market definition appendices. � Annex 7: analysis by Professor Andrew Chesher of the report produced by Professors Seabright and Magnac for Sky as part of its response to our Second Pay TV Consultation. � Annex 8: further details of parts of the market power analysis. � Annex 9: Oxera report on Sky’s profitability and on benchmarks for returns across wholesale and retail businesses in pay TV industries across a number of countries, and non-pay TV industries in the UK. � Annex 10: Ofcom / Brattle Group analysis of Sky’s cost of capital. � Annex 11: Value Partners report on examples of wholesale must-offer remedies in other markets: Australia, France, Italy, Singapore, Spain and the United States. 35
Pay TV phase three document – non-confidential version Section 3 3 The UK pay TV market Summary 3.1 Pay TV has become by some distance the biggest source of revenue in the UK’s TV industry, and has developed from its early years of cable and satellite offerings to an environment where there is the potential for a wide variety of services over different delivery mechanisms including IPTV and pay DTT. 3.2 However, we believe there are particular characteristics which are likely to remain little changed by the kinds of technical developments we have seen, and which are likely to affect our assessment of whether it is appropriate to take action to ensure fair and effective competition. The characteristics we focus on here are: Introduction 36 � 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. 3.3 In our First Pay TV Consultation we set out an overview of the UK pay TV market, and a number of characteristics of the market which we thought likely to influence the way in which competition operates, and services are delivered to consumers. 3.4 In our Second Pay TV Consultation we focussed on the particular importance of premium content, and the possibility that market power in the wholesale supply of premium content might restrict competition, to the detriment of consumers. 3.5 In this section we summarise our current view of those characteristics of the market which we have set out previously. In subsequent sections we consider the question of whether there is market power in the wholesale supply of premium content, and the likely effects on competition and on consumers. Overview of the UK pay TV market 3.6 We noted in our First Pay TV Consultation that the emergence and growth of pay TV markets in the UK and elsewhere has been driven historically by cable and satellite broadcasters, providing consumers with the option of paying for a wider choice of content than had traditionally been available from free-to-air, terrestrial broadcasters. 3.7 In the UK the main cable and satellite pay TV operators are: � Sky, created by the merger of Sky Television and British Satellite Broadcasting in 1990. Sky now has 9.3 million retail subscribers in the UK and Ireland.
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