Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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demand-side substitution is unlikely. Entry by new suppliers is unlikely in the short
term, because of the lack of availability of the relevant wholesale channels.
1.20 We consulted in September 2008 on a view that Sky had market power in the
wholesale of Core Premium Sports and Movie channels. After taking into account
additional material provided in consultation responses, we continue to believe that
Sky has market power in those markets, based on evidence including Sky’s high
market shares, its control of key rights and the limited potential for market entry, and
the absence of significant countervailing buyer power. Establishing precise
boundaries for a highly differentiated sector like pay TV is difficult; as a result we
have considered the out-of-market constraint from FTA TV, and concluded that this
does not alter our view that Sky has market power.
1.21 We are also now consulting on the view that Sky also holds a position of market
power in the markets for the retail of packages including Core Premium Sports and
Movies channels. Sky’s market shares are very high in the retail markets as well in
wholesale, and barriers to entry in acquiring the relevant wholesale inputs are also
high.
1.22 Although we believe Sky holds a position of retail market power, our competition
concerns focus not on this, but on the exercise of market power at the wholesale
level, as set out in the following section.
The effects of market power on competition
1.23 We have identified three potential concerns in the context of Sky’s market power,
which we consider in turn.
� Firstly, we are concerned that Sky, as a vertically integrated firm, with market
power in a key upstream market, may distribute its premium content in a manner
that favours its own platform and its own retail business. It might do so either by
denying this content to other retailers and / or other platforms, or by making it
available on unfavourable terms. The effect would be to reduce consumer choice,
and to inhibit the growth of innovative pay TV services. The increased importance
of ‘triple-play’ bundles creates a further risk that this distortion would extend to
the other services which are included in such bundles, notably broadband and
telephony services. We consider that Sky’s approach to the supply of Core
Premium channels creates a position under which there is not, and there is not
likely to be, fair and effective competition.
� Secondly, we are concerned that Sky may exploit content rights selectively, in
order to favour its own retail business and platform.
� Thirdly, we are concerned that Sky may set high wholesale prices for its content
in order to maximise wholesale profits. This can be reflected in high retail prices.
Restricted distribution of Core Premium channels
1.24 Our view is that Sky appears to be acting on an incentive to restrict supply of Core
Premium channels to other retailers. This incentive is likely to arise from its vertical
integration between retail and wholesale activities. We think this situation is and will
continue to be prejudicial to fair and effective competition.
1.25 Sky currently supplies its Core Premium channels to only one major third-party
retailer, Virgin. Sky appears to believe that it is under a de facto requirement to