Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
current price is constrained to competitive levels. Figure 17 shows the estimates of
consumer elasticity for Sky Sports and Sky Sports and Movies Mix packages. 139
Figure 17 Estimates of Sky Sports subscribers’ elasticities and wholesale critical
loss
1 Minimum elasticity to constrain a
wholesale monopolist (critical loss)
Sky Sports
and Movies
Mix
Sky Sports
Mix
[ � ] [ � ]
2 Sky conjoint estimate [ � ] [ � ]
Source: Critical loss: see Appendix 10 of annex 6 to Ofcom’s Second Pay TV Consultation; Sky
conjoint: [ � ] supplied to Ofcom by Sky in July 2007
4.143 Sky did not provide any detailed support for its arguments about why its elasticity
estimates from its Conjoint Study were unreliable. We do not consider its comments
are a basis for dismissing these estimates, and we note that Sky chose to rely on
them in response to our First Pay TV Consultation.
4.144 The relatively small samples in Ofcom’s willingness to pay survey (40 for Movies Mix
only, 147 for Sports Mix only and 95 for Sports and Movies Mix) means that the
confidence intervals around the estimates of elasticity are wide and the results are
sensitive to changes in assumptions used. Moreover there is a strong risk that these
results will have been subject to “stated preference bias”, i.e. the tendency of survey
respondents to exaggerate their willingness to switch in response to a price rise. We
therefore do not rely on our estimates of elasticity derived from our willingness to pay
survey.
4.145 The results of Sky’s conjoint study suggest that a wholesale price rise for Sky Sports
and Movies Mix and Sky Sports packages would be likely to be profitable. Sky’s
conjoint estimate continues to point to a narrow market. For the reasons set out in
paragraphs 4.43 to 4.45 and 4.52 to 4.53 we in any case interpret this analysis
cautiously.
4.146 The elasticity estimates discussed above relate to demand facing Sky, as opposed to
the market demand that would be faced by a hypothetical monopolist. A monopolist
supplier of premium sports channels would be likely to face less price-sensitive
customers than Sky does at present (because some Sky customers who have a
strong demand for premium sports channels could see Setanta as a substitute). As
such, with a hypothetical monopolist it is likely that elasticities would be even further
below the minimum elasticity in the critical loss test – further strengthening the view
that the market is narrow. 140
139 Where the estimated critical loss elasticity (line 1) exceeds the estimated elasticity (line 2) we
conclude that consumers are not price sensitive enough to constrain a monopolist from raising prices.
140 Sky has suggested that it sets its wholesale prices to avoid a margin squeeze infringement (source
Sky response dated 28 July 2008 to Ofcom’s information request dated 2 July 2008, paragraph 9).
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