Pay TV phase three document - Stakeholders - Ofcom

Pay TV phase three document – non-confidential version
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relationship between demand for premium channels and availability of DTT. There
are several reasons for this potential overstatement:
� The estimate of the relationship between DTT availability and demand for Sky
premium channels is not robust to changes in model specification.
� The instrument chosen to treat the endogeneity of availability of DTT may be
invalid as it has a role in determining demand.
� The study ignores the potential problem of endogeneity of access to cable.
Without treating this problem we cannot be sure that any of the estimated
coefficients are not biased.
4.180 The question for our analysis is whether FTA TV is a sufficient constraint on premium
sports channels to be included within the relevant market.
4.181 We recognise that the Seabright study shows some interaction between demand for
Freeview and pay TV – as, indeed, one would expect. However, it does not model
the effect of a price increase, and as such does not provide direct evidence that
Freeview is a constraint on the prices of premium sports channels.
4.182 Given the growth in the number of FTA channels and the increasing popularity of
Freeview, we might expect that if FTA TV and premium sports channels were strong
substitutes, we would observe a competitive response from Sky in the form of lower
prices or margins for its Sky Sports channels, or for Sky Sports to have lost
subscribers.
4.183 As we set out in paragraphs 4.200 to 4.208 below, the relationship between prices,
quality and programming costs is complex. Nonetheless we observe that both the
price of Sky Sports Mix packages, and [ � ], while the total number of subscribers to
Sky Sports Mix packages has increased over this period. Oxera’s analysis 157 also
shows that the growth of FTA has not prevented Sky from making high profits from its
pay TV channels.
4.184 Taken together we consider these factors suggest that the growth of FTA channels
has not sufficiently constrained Sky’s pricing of Sky Sports for FTA channels to be
included in the same market.
Supply side substitution
4.185 We turn now to the question of supply side substitution. Wholesale supply side
substitution would occur if a broadcaster were to introduce its own sports channel in
response to an increase in the price of Sky Sports 1. The OFT guidelines 158 on
market definition suggest that to be considered as a relevant constraint:
� Supply side substitution should occur within a reasonably short period of time – a
year.
� Entrants should not incur substantial sunk costs.
157 See section 6.
158 OFT 2004 Market Definition Guidelines paragraph 3.15