2.3 Marco legal
2.3.2. Entidades financieras
mately derived from a demand by consumers for retail services, we considered first the retail level, then the wholesale level, and then the rights level. In paragraphs 4.5 to 4.28 we summarize our assessment of the relevant market definition at each of these three levels before setting out our analysis more fully.
Summary
The retail level
4.5 Until the launch of Sky Movies on Now TV, it was not possible for pay-TV consumers to subscribe to Sky Movies packs or Sky Movies products4 on a stand-alone basis, ie without also taking a basic pay-TV subscription or package.5 Furthermore, a high proportion of Sky Movies subscribers take a package including Sky Sports. As a result, we found that the product dimension of existing competition between different retailers of Sky Movies (currently Sky and Virgin Media) was at least as wide as these Sky Movies packages, which included basic pay TV and in most cases Sky Sports. However, it appeared to us that competition between traditional pay-TV retailers was not limited to such packages and, in the light of this, we considered that a narrow market definition limited to Sky Movies was unlikely to provide a suitable framework within which to assess retail competition.
4.6 Nevertheless, given the focus on Sky Movies in our terms of reference, we also con- sidered the application of the hypothetical monopolist test to test whether there might be an economic market limited to Sky Movies.
1 Market Investigation References: Competition Commission Guidelines, CC3, June 2003. 2 CC3, paragraph 2.2.
3 In this respect, there was no disagreement as regards the retail and wholesale markets (in so far as some parties considered there to be a wholesale market). In its comments on the rights market, Sky suggested the geographic scope may be wider than the UK—see paragraphs 4.167 & 4.168 and 4.156.
4 We define Sky Movies products as pay-TV content that is sold for a clearly defined price—typically a pack of channels or group of such packs; the Sky Movies products are those products that include Sky Movies packs—some of these also include Sky Sports packs (eg dual movies/dual sports).
4.7 First, we carried out an assessment of the substitutability of other specific products and services for Sky Movies as follows:
(a) We considered whether particular products (ie DVDs, EST, movies on FTA TV and basic pay channels, cinema, PPV/TVOD and other movies subscription ser- vices already existing at the start of our inquiry) were close substitutes for Sky Movies packs. We analysed the prices of Sky Movies and these products and investigated whether the demand for Sky Movies was related to the relative prices between it and any of these products (see Appendix 4.1). We found that there was no close correlation between the prices of these products and Sky Movies, and that demand for Sky Movies did not appear to respond to changes in relative prices. Therefore, on the basis of this analysis, it did not seem to us that any one of these products was a close substitute for Sky Movies.
(b) Next, we considered whether the OTT services of Netflix and LOVEFiLM were substitutes for Sky Movies. We found that there were a number of similarities between the OTT services of LOVEFiLM and Netflix and Sky Movies, in particular all offer a wide range of films, with at least some in HD, and they are all available on a subscription basis, but we also noted significant differences. Moreover, due to the short time since the start of these services, there was inevitably some uncertainty about their impact. We observed that the results from our February 2012 survey suggested that the new services were likely to have some impact on subscriptions to Sky Movies. However, some caution was needed in interpreting these survey responses and other evidence suggested that the LOVEFiLM/ Netflix services would have a limited impact on subscriptions to Sky Movies, at least in the short term.6 On the basis of this evidence, we concluded that the new OTT services of LOVEFiLM and Netflix were substitutes for some existing and some prospective Sky Movies subscribers, but this population was not sufficiently large to render these services a close demand-side substitute for Sky Movies.
(c) Nevertheless, we noted that each of the services of LOVEFiLM and Netflix was a closer substitute for Sky Movies than other movie services such as BT’s Vision Film and PictureBox. Looking to the future, we also noted that there was some evidence to suggest that, over time, these services were likely to become substitutes for more Sky Movies subscribers, although we did not expect these services to become close substitutes for Sky Movies in the foreseeable future.
(d) We also considered Sky’s new OTT service, Now TV, which launched in July 2012 and offers Sky Movies on an unbundled basis (ie without requiring a sub- scription to any other pay-TV content) and, subsequently, is expected to offer a range of pay-TV content. In our view, Now TV competes to some extent with the existing OTT services of LOVEFiLM and Netflix. However, we noted that even if the OTT services of LOVEFiLM and Netflix were to be the nearest substitute for Sky Movies on Now TV, they would not become a close substitute for Sky Movies on traditional pay TV, and it appeared likely to us that, for the foreseeable future, traditional pay TV would continue to account for the large majority of Sky Movies subscribers. On this basis, we concluded that the OTT services of LOVEFiLM and Netflix were not a close substitute for Sky Movies overall (when considered regardless of the way in which Sky Movies is distributed to customers).
4.8 Nevertheless, what matters from a market definition perspective is the total strength of all the substitutes to Sky Movies collectively and, therefore, we considered the 6 In particular, [] and [] indicated that, []. Furthermore, we noted evidence from the USA and Canada which suggested that, in those geographic markets, the presence of Netflix had not yet had a significant impact on subscriptions to premium movie services on pay-TV there.
aggregate constraint on Sky Movies and its implications for market definition. We considered evidence relating to how consumers would respond to increases in the price of Sky Movies packs above the current level on the basis that, in principle, such evidence could be used to calculate the loss in revenue to retailers from increasing the price of Sky Movies packs and, hence (given assumptions on marginal costs), whether it would be profitable for a hypothetical monopolist over Sky Movies packs to increase prices compared with the current price of Sky Movies packs (in the absence of supply-side constraints).
4.9 However, a significant problem with this approach was that, in practice, Sky is the retailer of Sky Movies on its own platform, on TalkTalk’s platform and on the Internet7 and, as a wholesaler, it also determines the price at which it provides Sky Movies to Virgin Media (and other cable operators). Therefore, Sky is close to being an actual, rather than a hypothetical, retail monopolist over the Sky Movies packs and also benefits from bidding advantages derived from having significantly more Sky Movies subscribers on its platform than its rivals. Given that an actual retail monopolist of Sky Movies packs who benefits from bidding advantages (which undermine the supply-side constraints) would be expected to have increased prices to the point where it was no longer profitable to impose further price rises, a finding that price rises over the current level would be unprofitable would have no clear implications for market definition because current prices may very well exceed the competitive prices that are the proper starting point for such an exercise.8
4.10 In seeking to apply the hypothetical monopolist test to the retailing of Sky Movies packs, we needed to compare the incremental price that a hypothetical retail monop- olist would charge with the incremental price that would prevail in a competitive market for Sky Movies packs. In principle, there were two approaches which we might have taken:
(a) We could have attempted to compare the hypothetical monopoly price and the competitive price in the presence of all other existing characteristics of traditional pay-TV retailers, including in particular bundling of Sky Movies packs with basic pay-TV and in some cases Sky Sports. However, such bundling implied that the incremental price of Sky Movies depended on the price of other products in the bundle and hence on competition across these other products. Therefore, under this approach, it appeared to us that assessing the competitive price of Sky Movies required analysis within a broader market than Sky Movies packs.
(b) We could have sought hypothetically to separate retailing of Sky Movies from other aspects of traditional pay-TV retailing and focus only on stand-alone retail- ing of Sky Movies. Under this approach we would consider whether a stand-alone retail monopolist over Sky Movies without Sky’s other attributes (ie its pay-TV platform and large number of subscribers to basic pay-TV channels and Sky Sports) would be able to impose a small but significant non-transitory increase in price (SSNIP) over the competitive price. However, it appeared to us that the idea of a hypothetical retail monopolist over just one specific type of pay-TV content was rather artificial since content was almost always bundled together, and there was very little self-retailing by broadcasters/content aggregators on traditional pay-TV platforms. Nevertheless, as an alternative approach, which could have indicated that a narrower market ought to have been adopted, we considered it, despite its artificiality. However, we found that it was unlikely that such a hypo-
7 Via the Sky Go monthly ticket and also via Now TV.
thetical monopolist would be able to impose a SSNIP compared with the competi- tive price.
4.11 Therefore, in our view, neither of these approaches led to a retail market as narrow as Sky Movies. We concluded that we needed to assess competition at the retail level within a frame of reference which was wider than this, reflecting the nature of traditional pay-TV retail competition and including other products which are relevant to competition between traditional pay-TV retailers for subscribers. Accordingly, we did not adopt a narrow retail market definition limited to Sky Movies packs, products or packages.
4.12 In light of this analysis and finding, we then considered what other products or ser- vices should be included in the relevant product market. It appeared to us that:
(a) In addition to Sky Movies, the pay-TV retail market should include at least basic pay-TV products (included in all traditional pay-TV subscriptions) and Sky Sports (an important driver of many pay-TV subscriptions) since we had found that these products were closely connected in the process of rivalry for subscribers to pay- TV packages. Not to include these products would, in our view, result in an assessment which was a poor proxy for the reality of competition.
(b) SVOD-only products offered by traditional pay-TV retailers should be included in the retail market definition since, in making a decision to subscribe to traditional pay-TV or to continue with a traditional pay-TV subscription, SVOD-only products such as BT’s Vision Film and PictureBox were part of the choice offered by traditional pay-TV retailers, in the same way as hybrid linear/ SVOD products (such as Sky Movies) and linear-only products.
(c) Now TV was highly relevant to our assessment of competition and should be included in the retail market definition. This was because we noted that Sky Movies on Now TV offers substantially the same content as Sky Movies on traditional pay TV, and its price is similar to the incremental price of Sky Movies on traditional pay TV (when not bought with Sky Sports).
4.13 We found there to be sufficient rivalry between the SVOD services provided OTT by LOVEFiLM and Netflix and traditional pay-TV to include them in the retail market definition. Whilst we found that these services were closer competitors to each other than to packages of traditional pay-TV and were significantly differentiated from Sky Movies on Now TV, it appeared to us that Sky’s decision to distribute Sky Movies as the first content available on Now TV, and to do so on an unbundled basis, was at least in part a response to the perceived competitive threat from LOVEFiLM and Netflix.9 Other evidence also supported there being some competitive interaction between these services.10
4.14 It was less clear that TVOD/PPV services and à la carte channels influenced con- sumers’ pay-TV subscription decisions. We saw little evidence relevant to this ques- tion and we did not think it necessary to reach a view on whether these services were within or outside the pay-TV retail market in order to assess pay-TV competition. With regard to TVOD services, we recognized that, given the large number of well- 9 We noted that the launch of Sky Movies on Now TV reduced the minimum price of accessing Sky Movies from £32 to £15 (see Appendix 4.2), which represented a substantial effect.
10 Though the extent of interaction between traditional pay TV and OTT was uncertain, it did not appear to us to be of a different order of magnitude from that between different traditional pay-TV retailers. The available evidence suggested that about 6 per cent of traditional pay-TV subscribers switched between retailers per year (see paragraph 5.29), while our February 2012 survey suggested that, in 2012, OTT services might impact on around 3 per cent of subscribers to traditional pay TV (see Appendix 4.2).
resourced retailers now offering these services (see paragraph 2.134) and the wide- spread provision and increasing adoption of them, they might represent an increasing constraint on SVOD services, which could affect competition in the pay-TV retail market (including for packages of traditional pay TV and SVOD services). However, we remained uncertain about the implications of these developments and we had little evidence on the relative take-up of either TVOD/PPV services or à-la-carte channels. Overall, it appeared to us that it was not necessary for us to reach a view on whether TVOD/ PPV services or à-la-carte channels were within or outside our pay-TV retail market definition in order to assess competition.
4.15 At this stage of our analysis we found, therefore, that our retail market definition included both traditional pay-TV packages and OTT SVOD services. Having reached this conclusion, we considered next whether it was wider still, having regard both to product characteristics and the way in which rivalry occurs and to an assessment of whether a hypothetical monopolist of pay-TV would be able profitably to impose a SSNIP.
4.16 In applying the SSNIP test in this context, we noted that Sky was the pay-TV retailer with by far the largest number of existing subscribers, and Virgin Media had most of the remaining pay-TV subscribers and that therefore the constraints imposed by Virgin Media on Sky, and vice versa, were key to assessing the extent to which a hypothetical pay-TV monopolist could charge higher prices than those charged by existing pay-TV retailers. Other evidence was consistent with a hypothetical pay-TV retail monopolist being able profitably to increase prices above existing levels by a SSNIP, in particular:
(a) econometric analysis based on differences in Sky’s penetration across local areas in 2008;11 and
(b) Sky’s competitor monitoring which suggested that other traditional pay-TV retailers (Virgin Media and BT) were its closest competitors, and a more signifi- cant constraint than non-pay-TV companies (eg FTA broadcasters), although this evidence did not enable any quantification.12
4.17 Given that the hypothetical monopolist test should be carried out at competitive prices, we considered how the evidence considered above, which related to existing price levels, should be interpreted. We noted that, to the extent we believed compe- tition between pay-TV retailers to be ineffective,13 existing average prices were likely already to be above the competitive level. This suggested that the prices charged by a hypothetical monopolist would be further in excess of competitive prices than they are of existing prices, which increased our confidence in our view that pay-TV retailing was not too narrow a market definition.
4.18 We also considered the role of communications products and FTA TV. Overall, we found that the pay-TV retail market was separate from a market for communications products, although we recognized that features of one market could affect another and features of the pay-TV market could have effects in related communications markets, and vice versa. Similarly, whilst we accepted that the pay-TV retail market was affected by FTA TV, we were not persuaded that FTA TV should be included in the same market as retail pay TV. Therefore, it appeared to us that communications products and FTA TV should be considered as ‘out-of-market constraints’, ie factors
11 This provided some evidence of the constraint that Virgin Media imposes on Sky—see Appendix 4.6. 12 See Appendix 4.7.
which are outside the market but which we nevertheless take into account in our assessment of competition.