[Client name] Confidential [Title of report] Evaluation of the selection of comparators used in Annex 9 of Ofcom’s pay TV phase three document A report for British Sky Broadcasting Limited 18 September 2009 Final report [date] 1 British Sky Broadcasting Limited Sky comparator selection analysis Important Notice This report has been prepared by PricewaterhouseCoopers LLP (“PwC”) for British Sky Broadcasting Limited, in connection with a review of the comparative profitability analysis undertaken by Oxera in its report for Ofcom on Sky's profitability, under the terms of British Sky Broadcasting Limited’s engagement letter with PwC dated 31 July 2009 (the “Engagement”). PwC neither accept any responsibility nor owe any duty of care to any person (except to British Sky Broadcasting Limited under the relevant terms of the Engagement, including the provisions limiting PwC's liability) for the preparation of the report. 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All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP a limited liability partnership incorporated in England or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity. 18 September 2009 i British Sky Broadcasting Limited Sky comparator selection analysis Contents 1 SUMMARY AND CONCLUSIONS .................................................................................................................................................................................................... 1 1.1 Background and scope of the study ............................................................................................................................................................................ 1 1.2 Methodological framework for our analysis ................................................................................................................................................................. 1 1.3 Approach to drawing conclusions................................................................................................................................................................................ 2 1.4 Summary conclusions on Oxera’s non-TV comparators to Sky.................................................................................................................................. 3 1.5 Conclusions on Oxera’s TV comparators to Sky......................................................................................................................................................... 6 1.6 Conclusions on Oxera’s comparators to the notional Sky retail and Sky wholesale businesses ............................................................................. 10 2 INTRODUCTION ........................................................................................................................................................................................................................ 11 2.1 Background................................................................................................................................................................................................................ 11 2.2 Scope of the study..................................................................................................................................................................................................... 11 2.3 Our approach to the study......................................................................................................................................................................................... 11 2.4 Structure of this report ............................................................................................................................................................................................... 12 3 METHODOLOGICAL FRAMEWORK FOR OUR ANALYSIS ................................................................................................................................................................ 14 3.1 A methodological framework for profitability benchmarking...................................................................................................................................... 14 3.2 Oxera’s “closest comparators”................................................................................................................................................................................... 22 4 CHARACTERISTICS OF SKY RELEVANT FOR CHOICE OF COMPARATORS ...................................................................................................................................... 29 4.1 Introduction ................................................................................................................................................................................................................ 29 4.2 Sky in aggregate........................................................................................................................................................................................................ 29 4.3 Features of a reliable comparator to Sky in aggregate ............................................................................................................................................. 32 4.4 Oxera’s notional wholesale/retail split ....................................................................................................................................................................... 34 5 COMPARISON OF OXERA’S NON-TV COMPARATORS TO SKY...................................................................................................................................................... 36 5.1 Introduction ................................................................................................................................................................................................................ 36 5.2 Oxera’s “commercial radio” comparators .................................................................................................................................................................. 38 5.3 Oxera’s “record companies” comparators ................................................................................................................................................................. 45 5.4 Oxera’s “cinema” comparators .................................................................................................................................................................................. 50 5.5 Oxera’s “DVD rentals” comparators .......................................................................................................................................................................... 58 18 September 2009 ii British Sky Broadcasting Limited Sky comparator selection analysis 5.6 Oxera’s “book publisher” comparators ...................................................................................................................................................................... 63 5.7 Oxera’s “newspaper publishing” comparators........................................................................................................................................................... 69 5.8 Oxera’s “vertically integrated telecoms operators” comparators............................................................................................................................... 74 5.9 Oxera’s “alternative operators (MVNOs, fixed altnets)” comparators ....................................................................................................................... 80 6 COMPARISON OF OXERA’S TV COMPARATORS TO SKY ............................................................................................................................................................. 91 6.1 Introduction ................................................................................................................................................................................................................ 91 6.2 UK.............................................................................................................................................................................................................................. 91 6.3 Spain.......................................................................................................................................................................................................................