Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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understanding of consumers’ willingness to pay allows it better to assess the
value of the content rights that it bids for.
� Vertical integration either between retail and wholesale platform operations, or
between retail and wholesale content markets, may avoid the efficiency loss
associated with ‘double marginalisation’. This efficiency loss may arise when a
retailer purchasing content from a third-party wholesale channel provider does
not see the true marginal cost of supplying content to individual consumers,
which is close to zero, but instead sees a per-subscriber wholesale subscription
charge. Thus the retailer’s incentive to make the content widely available is
weakened. As a result, the retailer is likely to set higher retail prices and may be
discouraged from promoting / advertising the channel. In contrast, a vertically
integrated retailer sees the true marginal cost of content.
� Vertical integration of content origination and wholesale channel provision may
avoid the transaction costs associated with negotiating agreements to supply
both content rights and the rights to market and assemble a channel using the
content originator’s brand.
3.55 We also noted that vertical integration may change the incentives on firms which
determine how they transact with one another. This is because a vertically integrated
firm will also take into account the impact of its actions at one level of the supply
chain on other parts of its business. Absent regulation, there is an incentive for a firm
which is vertically integrated between wholesale and retail markets to refuse to
supply wholesale services to other retailers, or supply them on less favourable terms
than it supplies itself.
3.56 However, it is important to recognise that whether a firm acts on this incentive
depends in practice on a number of other factors. A key question which we
considered in our Second Pay TV Consultation was whether Sky, as a vertically
integrated wholesaler and retailer of premium content, was acting so as to restrict the
wholesale distribution of this content. We return to this question in section 6 of this
document.