Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
3.43 These characteristics create a strong incentive to distribute content to as wide a set
of consumers as possible. The incentive is particularly powerful in the case of
advertising-funded free-to-air broadcasting, where revenues increase with reach.
3.44 The incentives are somewhat more complex for subscription-funded pay TV
broadcasting. This is because subscription revenues are also likely to increase with
reach, but only if some form of price discrimination is adopted, which allows content
to be distributed to additional consumers, whose marginal willingness to pay is lower
than the average willingness to pay of existing consumers.
3.45 Price discrimination in these circumstances can have beneficial effects for both
producers and consumers, since it can be an effective way of recovering the high
fixed costs of generating content in a way that enables more consumers to take a
product. Price discrimination is widespread in the pay TV sector, though it operates
differently in the commercial and residential parts of the sector.
3.46 In the commercial sector, there is explicit price discrimination, in that different
customers are charged different prices for access to Sky’s Sports channels. In the
case of ‘pubs and clubs’, for example, prices are based on the rateable value of
premises, using this as a proxy for the value associated with distributing content to
specific premises. Hotels, betting shops and offices all have their own specific pricing
structures.
3.47 In the residential sector, all customers are charged the same price for the same
channels, so there is no explicit price discrimination. Instead, there is a form of
implicit price discrimination, which relies on the fact that retailers are likely to attract
more consumers by retailing bundles which contain a variety of channels containing
different types of content. In such circumstances a number of consumers may be
willing to pay the same aggregate price for a bundle, despite each attaching different
values to different elements of the bundle.
3.48 We have previously set out an illustrative example of this effect, which we will repeat
here. Consumer A values a sports channel at £10 and a movies channel at £2, and
consumer B values a movies channel at £10 and a sports channel at £2. A company
selling each channel individually would set the prices at £10; both consumers would
buy their most preferred channel, giving total revenue of £20. However, if the
company sets the price of a bundle of the two channels at £12, both consumers will
take the bundle, yielding revenue of £24.
3.49 Specific examples of retail bundling in pay TV include:
� Basic channels are commonly sold in bundles rather than individually. Sky retails
basic channels in a number of genre-specific entertainment packs, which can in
turn be aggregated into bundles containing multiple packs. Virgin Media retails
basic channels in three tiered packages, ‘M’, ‘L’ and ‘XL’, containing an
increasing number of channels (~45, ~100 and ~165 respectively).
� Premium channels are commonly sold in genre specific bundles (‘Sky Sports
Mix’, ‘Sky Movies Mix’) as well as in mixed bundles containing both sports and
movies.
� Premium channels are also commonly sold as part of a bundle with basic
channels, via a mechanism known as ‘buy-through’. This requires consumers to
buy a basic package before they can buy a premium package. All of Sky’s
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