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| Oftel Submission to the OFT Review of the Pay TV Market | |
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Section 2: MARKET ANALYSIS Market definitions 22. We believe
that it is right to distinguish the pay-TV market (ie the market where
television services are predominantly paid for by the viewer through
subscription or other payment for service) from the general television
market. This does not mean that the two are unrelated: while subscribers
to pay-TV are paying for access to programming additional to that available
on terrestrial TV - terrestrial free-to-air television is likely to
form the baseline which informs consumers' judgements of the quality
and value-for-money of subscription TV. There is some degree of overlap:
the terrestrial free-to-air channels are available on cable systems
as part of the basic channel package, and terrestrial broadcasters may
compete with pay-TV broadcasters for programming rights. 23. The distinction
between the pay-TV and terrestrial free-to-air recognises the importance
of the different barriers to entry and the different characteristics
of the two markets. Terrestrial free-to-air TV broadcasting is constrained
by spectrum limitations. In this country, only four channels are universally
available (A fifth terrestrial channel is on the way but will not be
have universal coverage). The terrestrial networks are able to command
the lion's share of the audience and the commercial networks the largest
share of advertising revenues. This pattern holds true even in the United
States where cable networks are very well-established. 24. Programme service
providers who do not have access to terrestrial spectrum must get access
to cable or satellite transmission capacity. In the past capacity constraints
have tended not to be so acute as for terrestrial TV broadcasting however
they are now increasingly becoming barriers to entry. In the case of
satellite this reflects the fact that overwhelming majority of consumer
satellite dishes are fixed and pointed toward one position - the number
of satellites (and hence transponders) that can occupy any one position
is finite. 26. Finally, pay-TV
differs from free-to-air TV in that in the former the consumer's valuation
of the programme services can be expressed in the price paid to the
service provider. This means that pay-TV is able to fully exploit the
willingness of consumers to pay for programming they value. This underpins
the ability of pay-TV channels with a relatively low share of the total
audience to successfully bid for exclusive sports rights in competition
with terrestrial channels with much larger audiences. 27. These characteristics
mean that it is appropriate to consider the pay-TV market as a distinct
market for the purposes of the investigation. 28. Within this
overall market definition we believe that may be helpful to make further
sub-divisions. Retail and wholesale markets 29. We believe
it is worth distinguishing the wholesale and retail markets - because
of the fact that Sky operates both as a wholesaler and a retailer in
programme supply and, to a lesser extent, distribution services (including
conditional access). We have therefore talked about the wholesale market
in programming supply and the retail distribution market. In the wholesale
market Sky supplies the competitors to its retail business. There is
we believe a tension between the interests of the wholesale business
(which are to maximise sales irrespective of delivery mechanism) and
the retail business which must compete for customers with other distribution
businesses. Distribution30. Distribution (of programmes to retail customers) may be considered to be a distinct market. The key characteristics here are the existence of gateways controlling access to the network. There are a number of barriers to entry:
31. Sky showed
that it was possible to overcome such barriers, from scratch when it
was the first mover in the pay-TV market. However, it is seems likely
that there are also considerable first mover advantages in this market
which mean that the scope for entry on a significant scale behind Sky
must be diminished - for example because of the need to obtain transponder
capacity on the satellites receivable by the installed subscriber base. Premium and other programme channels 32. It may also
be worth distinguishing between premium and other programme channels.
There is a restricted supply of the programming material needed to create
premium channels (a limited number of popular films, or major sporting
events) and this material has a relatively steep demand curve. Other
programming material is in more plentiful supply but the demand curve
is flat ie consumers are prepared to pay little or nothing extra for
them. 33. Premium channels
are regarded as the key driver of subscriber take-up of pay-TV. To the
extent that setting up an effective distribution system has substantial
fixed, and/or upfront costs it may only be possible to create such a
system through access to (and exploitation of) premium channels. Given
this limited supply, monopoly control of such programming material may
effectively foreclose the creation of alternative distribution systems
or restrict their development. 34. In addition
the market for premium programming material itself contains barriers
to entry. There seem to be three particular barriers: substantial fixed/upfront
costs; vulnerability to strategic behaviour by the incumbent; and the
need to have access to distribution networks. 35. Fixed/upfront
costs. Establishing a premium sports channels requires considerable
investment to ensure a supply of programming (rights to which must often
be purchased a long time in advance). If the attempt to launch the channel
is unsuccessful then the rights may have to be resold for a fraction
of their original cost (as Cable Programming Partners found). 36. Need to
have access to distribution networks. Access to distribution networks
is arguably the key to the ability to be able to bid successfully for
premium programming rights It seems very unlikely that a dominant position
in premium programming rights could be sustained without control of,
or at least guaranteed access to, distribution. It also seems very unlikely
that a new entrant without access to Sky's subscriber base could successfully
compete against it for premium programming rights. 37. Vulnerability
to strategic behaviour. The entry of a new player into the bidding
for premium rights is almost certain to lead to an increase in prices
for those rights. The incumbent may choose to either outbid the new
entrant or make the new entrant pay a heavy price for them. It seems
likely that an established incumbent is likely to be able to sustain
such a contest longer than the new entrant. 38. Alongside this
there are also considerable first mover advantages and/or advantages
to the network with the majority of subscribers. The majority network
is likely to be the most attractive to programme service providers as
it offers the greatest audience - and hence subscriber and advertising
revenues. This places real constraints on the ability of minority networks
to compete by offering exclusive content - such content would either
have to target particular niches or the operator would need to pay a
substantially greater price per subscriber to the programme provider
than the majority network would incur. 39. The size of
the cable operators' subscriber base relative to Sky is likely to increase.
This together with consolidation is likely to increase their ability
to compete for programming and even to compete with Sky. The vulnerability
to strategic behaviour and first mover advantage nevertheless appear
to be significant obstacles to the emergence of competition in this
market. Non-premium channels 40. The barriers
to entry to the market for the wholesale supply of general news and
entertainment appear to us to be different and less substantial because
the programming itself is not in such limited supply. The distinction
between premium and general news and entertainment markets within the
overall pay-TV market is also worth making because it appears to us
that the latter is a good deal more competitive. 41. From the perspective
of the programme provider however, there may be substantial barriers
to direct entry to the retail-distribution market. A programme provider
seeking direct access to the retail market would have either to establish
its own subscriber authorisation and subscriber management services
(with the large element of fixed and sunk costs this would involve)
or obtain these from a third party. There would still remain the problem
that the variable costs of subscriber management are quite high and
would normally be prohibitive unless spread across a package of channels.
Even if a programme provider is able to overcome these barriers it must
still acquire, or gain access to, a subscriber base. Sky's market position42. This framework provides a useful way to analyse Sky's position within the pay-TV market. Sky has substantial market shares in all of these sub-markets:
43. Retail-distribution.
The overwhelming majority of domestic satellite dishes in the UK are
pointed to the Astra satellites. While Sky does not control the transmission
system, it controls a significant amount of transponder capacity. In
any event access to satellite capacity is likely to take on a growing
significance as a barrier to entry and source of market power. While
it may not control the transmission system, Sky affiliate companies
control key gateways (conditional access and subscriber management)
to it. 45. Wholesale
supply of premium programming. Sky is the only wholesale supplier
for premium sports and movie channels. As such channels are a key driver
of the pay-TV market this means that, put in stark terms, companies
wishing to compete with Sky in the retail market must obtain programming
from Sky's wholesale operation. This market is subject to the substantial
barriers to entry discussed above. There appear therefore to be good
grounds for deeming Sky to be dominant in this part of the market. The
grounds for considering Sky to be dominant in general news and entertainment
programming do not appear to be as strong. 46. The possession
of substantial market shares together with the existence of substantial
barriers to entry leads us to conclude that there are good grounds for
regarding Sky as being dominant in the pay-TV market. Issues of concern 47. In our view,
the key issues for the inquiry concern Sky's use, or its ability to
use, dominance in one part of the market to leverage or maintain its
position in another - and what safeguards need to be put in place as
a consequence. 48. The main questions appear to concern:
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