Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
supply Virgin due to previous competition cases. From our review of Sky’s own
statements, our view is that its prices to Virgin appear not to be based on a
commercial calculation (e.g. weighing higher prices against greater sales volumes),
but rather on Sky’s view as to the highest price it can charge without coming into
conflict with the OFT’s 2002 margin squeeze test. At the current wholesale charges,
Virgin makes an incremental loss when it sells premium channels to an existing basic
subscriber.
1.26 Sky has not agreed terms for wholesale supply with retailers on other platforms.
From our review of documentary evidence relating to negotiations between Sky and
others, we can see that Sky’s response to a request for wholesale supply is normally
to propose that it should be allowed to retail on the platform in question. As a result,
negotiations between Sky and other retailers have tended to consist of the retailers
repeatedly asking for wholesale supply and Sky repeatedly expressing its preference
for a retail deal. Where Sky has discussed prices, is has not countenanced in any
meaningful way diverging from the cable rate-card. This is surprising given that our
‘vertical arithmetic’ calculations in our Second Pay TV Consultation indicated that it
should be incrementally profitable for Sky to wholesale at a price 25% lower than the
rate-card.
1.27 Our view is that Sky weighs the immediate commercial benefit of supplying other
retailers against the strategic benefit of withholding supply and/or restricting the
terms of supply. This view is based on documentary evidence of negotiations with
third parties, and the negative outcome of those negotiations, despite Sky’s having
an apparent commercial incentive to agree terms. Our view is that Sky derives two
strategic benefits from keeping its retail competitors weak:
� The ability to manage competition between retailers on different platforms, in
order to protect the position of Sky’s own satellite platform.
� The ability to prevent rival retailers from establishing a strong retail presence,
which, as well as being a threat in the retail market, could strengthen their
position in bidding for content rights.
1.28 Our view is that these strategic considerations also underpin Sky’s relative
willingness to retail its content over other platforms. If Sky were to retail across
numerous platforms, this would increase the availability of Sky’s content, which
would be immediately beneficial both for consumers and for Sky. However, it would
also allow Sky to manage retail competition so as in the longer term to protect its own
platform, and its position in bidding for content rights. We do not therefore believe
that a satisfactory solution to our competition concerns would be for Sky to become
the only actual or potential retailer of premium content across all non-cable platforms.
1.29 Furthermore, even in the short term Sky does not have an incentive to retail its
content as effectively on other platforms as on DSat, because if its Core Premium
channels are purchased elsewhere it loses the revenues that it can earn by bundling
them with other content and services. This lack of incentive is supported by the
available evidence. Where Sky does retail on other platforms, using its ‘Sky by Wire’
service, the resulting retail offering has attracted very low take-up.
Restricted exploitation of content rights
1.30 The same incentives which determine how Sky distributes its channels are also likely
to determine how it exploits its content rights, in the sense that Sky has an incentive
to exploit its content rights in such a manner as to favour its own retail business and
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