Extracts from the Pay TV Statement Annex 7 to Premium pay TV movies – Market investigation reference to the Competition Commission This is the non-confidential version. Confidential information has been redacted. Redactions are indicated by [ """ ]. Publication date: 4 August 2010 Pay TV Statement – Annex 7 – non-confidential version Contents A7.1 In this Annex we present key extracts from the Pay TV Statement1. They are: • Paragraph 4.89; • Paragraphs 4.157 to 4.182; • Paragraphs 5.42 to 5.45; • Paragraphs 5.47 to 5.59; • Paragraphs 5.519 to 5.573; • Section 6, Annex 4 appendix 8, Annex 5; • Paragraphs 7.59 to 7.171; 7.190 to 7.201; 7.210 and 7.219 to 7.233; • Paragraphs 7.235 to 7.238; 7.246 to 7.259; 7.262 to 7.290; • Paragraphs 7.291 to 7.312; • Paragraphs 8.47 to 8.102, 8.106 to 8.109 and 8.113 to 8.114; and • Paragraphs 8.187 to 8.218. 1 Minor referencing errors have been corrected. • 4.89 We said that each of these forms of vertical integration may enable firms to exploit synergies between different layers of the value chain and therefore deliver efficiency improvements. Examples include: • Vertical integration between retail and wholesale platform operations may ensure a close fit between the requirements of consumers and the technical platform offering. • Vertical integration between retail and wholesale content markets may allow content to be more closely tailored to consumer preferences. • A wholesale channel provider which is vertically integrated with an incumbent retailer may have an informational advantage because its improved understanding of consumers’ willingness to pay allows it better to assess the value of the content rights that it bids for. • Vertical integration either between retail and wholesale platform operations, or between retail and wholesale content markets, may avoid the efficiency loss associated with ‘double marginalisation’. This efficiency loss may arise when a retailer purchasing content from a third-party wholesale channel provider does not see the true marginal cost of supplying content to individual consumers, which is close to zero, but instead sees a per-subscriber wholesale subscription charge. Thus, the retailer’s incentive to make the content widely available is weakened. As a result, the retailer is likely to set higher retail prices and may be discouraged from promoting / advertising the channel. In contrast, a vertically integrated retailer sees the true marginal cost of content. • Vertical integration of content origination and wholesale channel provision may avoid the transaction costs associated with negotiating agreements to supply both content rights and the rights to market and assemble a channel using the content originator’s brand. The future of the UK pay TV sector 4.157 This Section sets out potential future developments for the UK pay TV sector, looking at a five-year timeframe and beyond. It considers the implications for content, distribution, devices and consumption habits and follows on from our views in the consumer effects Section of our Third Pay TV Consultation. In that document we identified: • Steady growth in analogue pay TV services during the 1990s, on both satellite and cable, driven by access to premium content, and in particular the acquisition by Sky in 1992 of exclusive rights to live Premier League football. • The migration from analogue to digital at the end of the 1990s, greatly increasing the range of content and value-added services that could be delivered to subscribers. • Over the last five years, continued growth of Sky’s satellite service and of Freeview, alongside very limited growth on cable. The key dynamic in recent years has been between Sky, driving growth in pay TV, and Freeview, driving growth in free-to-air multi-channel TV. 4.158 We then identified the need to take a forward-looking approach to understanding how the market is likely to develop, taking into account such issues as: • The consolidation and restructuring of the historically fragmented UK cable industry under the Virgin Media brand. • The emergence of new platforms for delivering pay TV services (BT Vision, Top Up TV, TalkTalk TV) based on new distribution technologies. • The emergence of new platforms for the delivery of multi-channel free-to-air services; some of these also have the potential to deliver pay TV services (e.g. Freesat, the proposed Canvas service). • The intervention by the European Commission to change the way in which Premier League football rights are sold. The 2007 / 08 football season was the first since 1992 for which Sky has not owned these rights exclusively. • The increasing importance of convergence and the bundling of pay TV services with broadband and voice services. 4.159 To help frame various forward-looking scenarios we pointed to research by consultants Deloitte, which was carried out as part of Ofcom’s ongoing strategic thinking. This research outlined seven different scenarios built around how the audiovisual markets could develop in the future. They ranged from scenarios in which there was little change to scenarios where there were more marked changes in technology, uptake of devices and changes in consumer behaviour. 4.160 This Section provides a more detailed overview of the UK pay TV sector and in doing so focuses on current trends and developments that could take place in the future based on a range of indications. The audiovisual industry is undergoing significant change in large part influenced by the widespread availability of broadband and related technologies coupled with changing consumer habits. Current trends 4.161 While it may be difficult to accurately assess how a sector will develop over a longer time horizon, current trends can offer useful indicators to future behaviour and developments. 4.162 Current observations of the UK audiovisual sector suggest: • There remains a strong appetite for watching TV and viewing levels on the whole are increasing98. • Consumers are demonstrating an appetite for enhanced viewing experiences. At the end of 2009, around 3.5 million homes had the reception equipment – set-top boxes and integrated digital televisions – capable of accessing HDTV channels and on-demand content99. • Content consumption habits are changing as on-demand services become more widespread. Such services enable consumers to take increasing control of their viewing through applications like DVRs or VoD (more than half of Virgin Media digital TV customers – 58% – regularly used VoD, including catch-up TV, at Q4 2009, up from 47% at Q4 2008100). • New technologies are becoming more robust. For example, increased broadband speeds and availability, coupled with more advanced delivery techniques, are enabling consumers to watch high-quality video over the internet: 23% of adults with home internet watch online catch-up TV, up from 17% a year earlier (Ofcom Communications Market Report 2009101). • Portability and transferability are likely to become more important to consumers as they watch and listen to content on a greater range of devices. This is already being seen, in part helped by the take-up of devices such as Apple’s iPod and iPhone. • More consumers are buying pay TV services as part of bundles of communications services. In Q1 2009, 34% of UK adults that claimed to buy a bundle of services bought a three-product combination of TV, broadband and fixed-line telephone, up from 12% in 2005102. • ‘Hybrid’ models are becoming more common, whereby different technologies are combined to create more advanced products and services. For example, combining broadcast and broadband distribution technologies in one device to offer both linear and non-linear programming. Figure 23 describes some of the hybrid devices currently available in the UK. 98 http://www.ipa.co.uk/content/IPA-publishes-Q4-2009-Trends-in-TV-Report 99 See Figure 13, UK homes with linear HDTV channels. 100 http://phx.corporate- ir.net/External.File?item=UGFyZW50SUQ9MzMxMjl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 101 http://www.ofcom.org.uk/research/cm/cmr09/ 102 http://www.ofcom.org.uk/research/tce/ce09/research09.pdf Figure 23 Overview of selection of hybrid devices available in the UK Service Operator Description Hardware cost Other costs TV service offering linear channel Minimum price BT Vision BT over DTT and on-demand content From £15 £14.99 p/m (plus cost via IPTV of broadband) TV set with broadband connection Cello, Connected for ‘over-the-top’ (i.e. unmanaged) Cello TV set Sony, LG - TVs online VoD content such as as from £499 and others YouTube and BBC iPlayer. DTT receiver with broadband PPV and subscription connection for ‘over the top’ VoD. Fetch TV IP Vision £129.99 – £219 required for Sky Has deal with Sky Player for content. premium channels and VoD. Digital media receiver that plays From £219 (for Pay-per-view (from Apple TV Apple content from iTunes store, 160 GB) £1.19) selected websites and owner’s PC Games console offering on- demand capability through Xbox PPV from c. £2.10. Xbox 360 Microsoft live network. PPV films and Sky From c. £150 Subscription required Live Player premium channels for Sky content. available Games console with optional DTT PlayStation From c. Pay-per-view from c. Sony tuner (Play TV) and DVR. VoD 3 £249.99 £2 content from PlayStation network TV streaming and ‘placeshifting’ Sling device that allows users to stream Slingbox From c. £69.99 - Media content remotely to a PC or mobile device Source: Ofcom, operators 4.163 We have also assessed what consumer benefits these developments and innovations could bring. These include: • Quality, as consumers are adopting enhanced viewing experiences in greater numbers, such as HDTV, and in the future, potentially 3DTV. • Choice, where developments in technology or packaging can offer a greater range of products and services for consumers.