Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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its own platform. The resulting selective exploitation of content rights might be a
concern if it allowed Sky to protect its market power, and distort competition.
1.31 Our concern here relates to the exploitation of the rights to distribute movies via
Video on Demand (VoD). These have a high strategic importance, due to the
potential which we have already noted for disruptive change in the way movies are
distributed. Various sets of VoD rights can be identified:
� VoD services sold on a Pay-Per-View (PPV) or Pay-Per-Download (PPD) basis.
These rights are widely available, on a non-exclusive basis. However, the
payment mechanisms allowed by these rights, and the associated level of prices,
mean that services based on these rights have thus far not developed into a
major part of the market.
� VoD services sold on a subscription service (SVoD). At present the movie studios
bundle these rights with the rights to show movies on subscription linear
channels, and these bundled rights are acquired on an exclusive basis by Sky.
Sky does not however have the capability to exploit these SVoD rights on its own
TV platform, and it does not have the incentive to develop a product based on
these rights to be supplied to competing TV platforms. Sky therefore only exploits
the rights via its PC-based Sky Player application, which has thus far had limited
impact on the market.
1.32 We acknowledge that as a general rule competition authorities and regulators should
be very cautious about intervening to change how firms exploit content rights, due to
the risk that such interventions could stifle innovation. However, in the context of
Sky’s market power there appears to be a risk that innovation in the development of
VoD services may be stifled by the manner in which the VoD rights to premium
movies are currently being exploited.
High wholesale prices
1.33 We said in our Second Pay TV Consultation that the evidence of whether wholesale
prices are high is less clear-cut than the evidence on channel distribution. Evidence
on wholesale prices is difficult to interpret for a number of practical reasons, including
the following:
� The costs of producing content are largely fixed, resulting in a marginal cost
which is close to zero. The appropriate measure of competitive prices is
particularly difficult to determine in such circumstances.
� Profitability analysis is made difficult by uncertainties regarding the level of capital
employed, and in particular the level of intangible assets. A disaggregated
profitability analysis which seeks to establish profitability in different parts of Sky’s
business is particularly complex because of uncertainties associated with
allocating both these assets, and common costs to particular parts of Sky’s
business.
1.34 Nevertheless, our view was that Sky did appear to be making an operating margin on
the wholesale of premium channels which was higher than its overall operating
margin. We further commented that the gross margins which Sky makes on premium
movie content are significantly higher than those which it makes on premium sports.
1.35 Since our last document, we have engaged Oxera to carry out a full analysis of Sky’s
profitability, particularly focusing on the value of Sky’s intangible assets. Oxera’s