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5.118 The number of firms competing in a market is a basic measure of structure that is relevant to competition. In general, and at least to some extent, rivalry is likely to be stronger the more companies there are competing for customers’ business.

5.119 In the pay-TV retail market, there are two long-established and substantial traditional pay-TV retailers (Sky and Virgin Media), and three companies which started offering traditional pay-TV services later (BT Vision, TUTV and TalkTalk TV) and which have so far achieved a relatively small share of the market.

5.120 In the course of our inquiry there was significant OTT entry by LOVEFiLM and Netflix and both companies acquired a substantial number of subscribers in a short period.89 However, at the time of our report, the impact of these services on the pay-TV retail market in terms of acquired market share was still limited.90 _{Therefore, our view} remained that, at that time, the main competitors in the pay-TV retail market were Sky and Virgin Media, and the other smaller competitors provided only a limited constraint.

5.121 Nevertheless, as discussed in Appendix 4.2, we expected OTT services to become closer substitutes for traditional pay TV over time due to factors such as: (a) the increasing adoption of Internet-connected TVs and/or STBs (improving convenience and reducing dependence on games consoles as a means of accessing OTT

services on households’ main TV); (b) the increasing availability of broadband, and faster broadband; (c) an increasing awareness of OTT among less technologically- aware households, in particular following the launch of services which ‘popularize’ OTT services, eg YouView; (d) social factors, including interaction on social media; and (e) an improving range and quality of content on the existing OTT services of LOVEFiLM and Netflix (ie under existing licensing agreements). In the light of these factors, we expected the constraint on traditional pay-TV retailers from new entrant OTT suppliers, currently LOVEFiLM and Netflix, to increase.

Market shares and concentration

5.122 In assessing market structure, competition authorities sometimes have regard to market shares and concentration measures.

5.123 A market share above 30 to 40 per cent is sometimes regarded by competition authorities as sufficient to give a firm market power.91 _{Precise market shares among} pay-TV retailers depend on the method of calculation but our estimates suggested that Sky’s market share was well above 30 to 40 per cent, indeed it has been con- sistently above 60 per cent for several years.92

5.124 A market with an HHI of concentration above 2,000 to 2,500 is often regarded by competition authorities as highly concentrated.93 _{Our estimates suggested that the} HHI for pay-TV retailing was well in excess of this figure, indicating that it was a

89 _{See Appendix 4.2.}

90 _{The OTT entry by LOVEFiLM and Netflix was particularly relevant to the provision of pay-TV movies services, which we con-} sider in Appendix 4.2 and Section 6.

91 _{These figures are mentioned in the recent CC/OFT merger assessment guidelines (CC2).} 92 _{See paragraphs 5.16–5.19.}

93 _{CC2 suggests that the OFT may regard HHI values above 2,000 as highly concentrated. The US horizontal merger} guidelines (see www.ftc.gov/os/2010/08/100819hmg.pdf) state that, based on their experience, the agencies (DoJ and FTC) generally classify markets into three types: unconcentrated (HHI below 1,500), moderately concentrated (HHI between 1,500 and 2,500) and highly concentrated (HHI over 2,500).

highly concentrated market. Sky pointed out that pay-TV retailing was also highly concentrated in many other countries, which we acknowledged.94

5.125 As well as current market shares and the level of concentration, changes in market shares may also be relevant to assessing competition. If the leading firm changes over time, this may suggest that no firm can achieve a position that is beyond chal- lenge and that competition may be stronger than implied by indications from an indi- vidual year. However, we found that the overall market structure for retail pay TV in the UK (with Sky being the leading company followed by Virgin Media) had stayed broadly the same since pay TV started to be offered on a significant scale in the early 1990s. The market shares of Sky and Virgin Media had changed somewhat over time (from around 2000, Sky had gained market share from Virgin Media, reflecting some degree of competition between them), but the overall balance of their positions had been unchanged.95

5.126 Sky pointed out that its platform was available to twice as many homes as Virgin Media’s and its market share in areas where Virgin Media’s platform was available was lower than its overall market share. Based on Sky’s data, we estimated that, in 2010, about [] per cent of pay-TV subscribers in areas where Virgin Media was

available were with Sky, compared with [_{] per cent who were with Virgin Media.}96

Sky said that such outcomes indicated that Sky and Virgin Media were closely matched competitors and that national market shares were not relevant. We dis- agreed. We were considering a national market, where pay-TV retailers’ offers were made to consumers on a national basis. The constraint that Virgin Media exerted on Sky was limited by the fact that its share of subscribers was zero in around half the country. Furthermore, if Sky and Virgin Media were closely-matched competitors with national pricing, we would have expected Virgin Media’s share of subscribers in areas where its platform was available to have been greater than that of Sky (to make up for the fact that its share was zero in other areas).97 _{In our view, the fact} that Sky’s share was greater than 50 per cent even in areas where Virgin Media was available was a reflection of Sky’s competitive strength.

Product differentiation and switching

5.127 High concentration may not always imply weak competition. In some circumstances, there may be vigorous competition even when there are a very small number of rivals (for example, this may be the case where, among other things, firms offer similar products, are unable to coordinate their offerings and are not capacity constrained). While we saw no evidence that pay TV was characterized by coordination or capacity constraints, there was substantial differentiation between products in the pay-TV retail market (see paragraphs 5.20 to 5.26).

5.128 The different pay-TV retailers can reach differing proportions of UK properties. For example, Virgin Media’s network extends to only about half of UK households, while

94 _{Sky said that there would be few consumers in the world served by a pay-TV sector that had an HHI below 2,000–2,500, the} range regarded as indicating a ‘highly concentrated market’. By way of example, Sky added that PwC’s analysis of pay-TV ser- vices available in other European countries had found that European consumers rarely had more than three different pay-TV services available to them; most had a choice of two pay-TV retailers.

95 _{See paragraphs 5.16–5.19.}

96 _{The Virgin Media area market shares were our estimates for calendar year 2010 using Sky data for subscribers of Sky and} Virgin Media, but including an estimate for pay-TV retailers other than Sky and Virgin Media.

97 _{In these hypothetical circumstances, we would have expected Virgin Media’s offer to have reflected the fact that it faced} competition from Sky in all areas where its service was available; with the result that, in those areas where Virgin Media was available, its offer would have been attractive to more subscribers than Sky’s offer. We would have expected Sky’s offer to have reflected both the relatively stronger competitive constraint it faced in areas where Virgin Media was available and the relatively weaker competitive constraint it faced in other areas.

there are also limits to the properties Sky can serve.98 _{The effect of this limited over-} lap in coverage is similar to product differentiation because it means that Sky and Virgin Media do not compete directly for all subscribers.

5.129 As well as differences in geographical coverage, pay-TV retailers are differentiated by the quality and range of content and facilities they offer. Due to technology con- straints, some traditional pay-TV retailers (in particular those relying on DTT) had been unable to offer the full range of linear content offered by Sky and Virgin Media and had thus been unable to compete directly for all subscribers.99 _{The full range of} linear content is also not relevant to OTT services, which operate via a different business model. However, even with regard to traditional pay-TV, we did not assume that effective competition necessarily required all pay-TV retailers to offer the same content; indeed, we recognized that competing to acquire content was in principle an aspect of competition between pay-TV retailers.100

5.130 Also relevant was that, due to switching barriers associated with perceived ‘hassle’ and subscriber inertia (see paragraph 5.43), we found that competition to date had been focused on a subset of subscribers, ie those new to pay TV and existing pay- TV subscribers willing to switch retailers. This meant that, over a given period, a reduction in price by one supplier had the potential to attract fewer new subscribers away from other suppliers than would be the case without these factors. However, in our view, these barriers were likely to be less relevant with regard to switching from traditional pay TV to OTT pay TV, including by downgrading to a more limited traditional pay-TV package (see paragraphs 5.45 and 5.46).

5.131 A low rate of actual switching between firms may be consistent with an alternative model of competition where consumers use the threat of cancelling their subscription to negotiate a better deal from their existing supplier. However, we did not believe that this sort of process, in itself, was likely to lead to effective competition in the pay- TV retail market, as the results of our December 2010 survey suggested that only about 30 per cent of pay-TV subscribers had considered switching in the last two to three years (see paragraph 5.37). Furthermore, Ofcom data suggested that very few consumers had attempted to negotiate with their pay-TV supplier and some of those who had were unsuccessful.101 _{At the time of our report, we did not know whether} this might change, and if so by how much, as a result of competition from OTT pay- TV retailers, though we noted that [] (see Appendix 4.2).

Ease of entry/expansion and countervailing buyer power

5.132 Where large-scale entry or expansion is easy, existing suppliers may be constrained by the threat of entry or expansion. However, it appeared to us that large-scale entry/ expansion into traditional pay TV was not easy (see paragraphs 5.58 to 5.69), among other things because large-scale entrants needed to incur significant upfront costs in attracting subscribers and take account of the likelihood of a competitive response by existing suppliers. The same barriers also limited the scope for large-scale expansion by existing small suppliers of traditional pay TV. We noted that the largest telephony 98 _{Not all customers are able to have a satellite dish installed and some have aesthetic objections to installing a satellite dish on} their dwelling. See also paragraphs 5.21 & 5.22.

99 _{See paragraph 6.95(a) of our August 2011 provisional findings.}

100 _{We recognized that movies were an important part of the content offered on the OTT services of LOVEFiLM and Netflix, and} therefore we considered the impact of these services on the significance of Sky Movies within the pay-TV market (see Section 6).

101 _{Based on Ofcom’s consumer decision-making surveys for July–August 2008, 2009 & 2010, we estimated that about 6 per} cent of respondents had in the past two years asked their current supplier to match a better deal which they had seen with a different service supplier, and only just over half of these respondents were successful in getting the better deal matched (these figures excluded about 2 per cent of respondents to the survey who answered ‘Don’t know’ to the relevant question).

and broadband suppliers (BT and TalkTalk) had entered traditional pay TV but had achieved only a relatively small scale compared with Sky and Virgin Media and, so far, they had not been able to expand rapidly to challenge these large incumbents. (We discuss the entry by LOVEFiLM and Netflix as OTT pay-TV retailers in more detail below.)

5.133 We noted that the ability to access content was among the factors relevant to entry and expansion (see paragraph 5.63) and, in the context of movies, we assess the significance of FSPTW content to subscribers’ choice of pay-TV retailer in Section 6 and the barriers to gaining FSPTW content in Section 7.

5.134 The great majority of pay TV is purchased by final consumers and we did not con- sider that they held countervailing buyer power.102