Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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� The wholesale market for Core Premium Movie channels comprises Sky Movies
Action & Thriller, Sky Movies Comedy, Sky Movies Drama, Sky Movies Family,
Sky Movies Premiere, Sky Movies Premiere+1, Sky Movies SciFi & Horror, Sky
Movies Screen 1, Sky Movies Screen 2, Sky Movies Modern Classics, Sky
Movies Indie and Disney Cinemagic and the HD versions of these channels.
4.14 Sky is both a wholesaler (to cable firms) and retailer of Core Premium channels. In
defining markets at the wholesale level, we have considered the constraints facing a
hypothetical wholesale monopolist, rather than an integrated wholesale/retail
monopolist, in order to focus on effects at this level. However, we have had regard to
the fact that Sky is vertically integrated where relevant.
Retail markets
4.15 The competition concerns we outline in section 6 below do not rest on the existence
of retail market power – indeed, as we explain in that section, our concerns derive
from the potential exercise of market power at wholesale level. However, it is clear
that the effects of those concerns are felt downstream. This means that an
assessment of the relevant downstream markets can be helpful to assess the impact
of concerns about upstream markets on downstream markets.
4.16 In assessing wholesale market definition and market power, we have had regard to
the indirect constraint on the prices of a hypothetical wholesale monopolist that could
arise if (a) wholesale price increases were to be passed on in retail prices and (b)
subscribers were to respond to these retail price increases by switching to other
services. This is distinct from the direct constraint that could arise from pay TV
service providers responding to an increase in wholesale prices by choosing to retail
other channels (demand-side substitution), or by an alternative supplier responding
to a wholesale price increase by entering the market and supplying the same content
as the wholesale monopolist (supply-side substitution), both of which we also
consider.
4.17 With its focus on the willingness of subscribers to switch to alternative TV content,
the analysis of indirect constraints is closely related to retail market definition. Our
assessment of the indirect constraints on wholesale markets makes clear that the
downstream markets for bundles containing Core Premium channels are strongly
differentiated 50 .
50 The main added variable in the assessment of indirect constraints is the extent to which an
increase in wholesale prices would be passed through into higher retail prices. In general, a less than
100% pass-through rate implies that substitution at the wholesale level due to consumer switching is
weaker than at the retail level, and this would tend to reinforce the conclusion of a limited indirect
constraint on wholesale prices. In the present case, Sky determines two sets of prices for its premium
channels: its own retail prices, and the wholesale rate-card prices which are paid by cable firms. It
does not face a decision as to how much of its own wholesale price increase it will pass through in its
own retail price. It simply sets the optimum retail price, taking into account both subscriber price
sensitivity and the impact on its cable rate-card price. Sky sets the cable rate-card by reference to its
interpretation of a margin squeeze test (see section 6), suggesting that (a) if Sky increases its own
retail price it is likely to increase the rate-card price by the same amount and (b) the rate-card price is
unlikely to allow cable firms scope to absorb any increase, so any increase in rate-card price is likely
to be passed on in the retail prices of cable firms. We therefore consider that the pass-through rate is
likely to be at or close to 100%.