Pay TV phase three document - Stakeholders - Ofcom

Section 1
1 Summary
Pay TV phase three document – non-confidential version
1.1 This is our third publication on pay TV since starting this project in early 2007. We
confirm our view that some content – various sporting events and first-run Hollywood
movies – is of sufficient importance to consumers that channels including this content
are in their own narrow wholesale markets; i.e. they are not replicable, and other
channels are not good substitutes for them. We have added a view on retail markets
for consultation, where we believe markets are similarly narrow.
1.2 We confirm our view that content aggregation has enabled Sky to gain a position of
market power in these wholesale markets for premium sports and movies channels.
We are now also consulting on a similar view in retail markets.
1.3 We confirm our view that Sky is acting on an incentive to restrict the distribution of
premium channels, with effects on a variety of platforms including cable, DTT and
IPTV. Despite lengthy negotiations and its own claims that it has an incentive to
distribute its channels as widely as possible, Sky has still concluded no wholesale
agreements for premium channels with non-cable retailers. This situation is not
consistent with fair and effective competition. It has a detrimental effect on
consumers, in the short term by reducing choice, and in the long term by dampening
innovation.
1.4 We have commissioned further work on an additional potential issue arising from
market power – high wholesale prices. We are now consulting on the view that: Sky
appears to be making high aggregate returns; returns are higher in its wholesale
business than its retail business; and margins are likely to be higher in the wholesale
of movies channels than sports channels. Sky’s high wholesale margins are likely to
be reflected in high prices paid by consumers.
1.5 We continue to believe that it is appropriate to deal with our concerns about restricted
distribution by imposing a wholesale must-offer obligation under our sectoral powers.
The case for doing so does not depend on the evidence of high wholesale prices, but
it is strengthened by that evidence. We are now setting out options for the specifics
of this obligation. We consult in particular on a range of regulated retail-minus prices
for Sky’s wholesale products.
1.6 We do not believe there is a case for intervening to require far-reaching changes in
the way content rights are bought and sold. We do however believe that there may
be a case for more targeted interventions in relation to subscription video on demand
movie rights, and in relation to the next FAPL auction.
1.7 Separating the sale of subscription video on demand movies rights from standard
subscription rights could promote innovation, especially in relation to IPTV, and might
also increase competitive pressure on wholesale margins. We are considering a
market reference to the Competition Commission on this subject, but propose first to
explore with the Hollywood studios what their current commercial plans are, and
whether these would reduce the need for regulatory intervention.
1.8 In sports, the existing FAPL commitments will not apply to the 2012 auction. We
therefore intend to review with the FAPL how it intends to ensure that this auction
complies with competition law. That might involve exploring with the FAPL whether it
is willing to provide new commitments.
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