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4.26 We first considered whether there was a separate market for movie rights from the major studios (mentioned in our terms of reference) or whether the market definition should include movie rights from all studios. We acknowledged that, if we were able to carry out the hypothetical monopolist test starting with the movie rights of the six major studios, we might conclude that these studios could impose a SSNIP over the supply of their rights because the six major studios account for a large share of revenue and viewing. However, we did not regard this as an appropriate application of the hypothetical monopolist test as the test should start with a product definition, and there seemed no reason to us why movies distributed by the six major studios should be regarded as a different product from movies distributed by non-major studios. Further, although smaller suppliers of a product (often referred to as a com- 16 _{Even though we did not see a sustainable source of market power arising simply from wholesaling Sky Movies, it was poss-} ible that, as envisaged in our theory of harm, Sky’s wholesale price of Sky Movies was above the competitive level due to Sky’s retail market power.

17 _{A further illustration that Sky’s actual wholesale supply of Sky Movies was not an appropriate framework for assessing our} theory of harm was that no such market would exist if Sky made no wholesale supply of Sky Movies to any other retailer. A situation where no supply is made (and hence where there is no market) is similar to a situation where there is supply but at a high price (and hence where there is a market ‘monopolized’ by Sky).

petitive fringe) will typically exercise a limited constraint on the larger suppliers, this does not mean that smaller suppliers should be excluded from the market definition. Accordingly, we believed that the starting point for the hypothetical monopolist test should be all rights to content generally understood as movies and, therefore, in principle, we included FSPTW rights to all movies in the market.

4.27 We judged that the market should not be widened to include rights to non-movie TV programmes because:

(a) whilst the nature and focus of TV channels could change over time and other content can be a substitute for FSPTW content within movie products, we saw no evidence to suggest either that Sky would change materially the type of content shown on Sky Movies18 _{or that a SSNIP applied to movie rights would induce} such a change; and further

(b) even if substitutability of individual movies was sometimes weak, overall, a hypo- thetical monopolist movie supplier would still be in a stronger negotiating position than the studios are currently, even if licensing rights in a particular window to a powerful licensee (such as FSPTW rights to Sky).

4.28 As to whether the market should be limited to FSPTW movie rights or should cover all movie rights, we concluded that the appropriate frame of reference for our analy- sis of issues in relation to the supply and acquisition of FSPTW movie rights was a price discrimination market limited to FSPTW movie rights. This was due to the dis- tinctive characteristics of FSPTW rights compared with rights for other windows (see paragraphs 4.160 to 4.162). Whilst we accepted that there was substitution on the demand side between rights in different windows, and that there could be substitution between products which included movie content from different windows, we observed that the FSPTW was temporally distinct from other windows (except the DVD and EST windows19_{), which implied that substitution between rights in different windows} was sufficiently weak for them to remain separate. Again, this did not preclude us from considering a broader range of movie rights or movie content where necessary for our analysis.

Background

4.29 Ofcom referred to us for investigation the supply and acquisition of subscription pay- TV movie rights in the FSPTW from the six major studios and the wholesale supply and acquisition of packages including core premium movies channels (defined as Sky Movies channels—see Section 1). During the period of our inquiry, and for many years previously, Sky has held the FSPTW rights of all the major studios and it exhibits this content on its Sky Movies channels and within its associated SVOD services. However, as noted in our guidelines, the relevant economic market may not coincide with the particular goods or services that are described in the reference.20 4.30 As a general point, we noted that TV services are characterized by low marginal

costs, ie the cost of producing and transmitting content to an additional viewer is low (and, because of this, content is sometimes described as a public good). Content suppliers, including movie studios, receive fees for granting TV companies the rights 18 _{Although in the past it has occasionally shown TV series on Sky Movies.}

19 _{This does not apply to the DVD or EST windows as they are contemporaneous with the FSPTW, but our analysis in} Appendices 4.1 and 4.8 suggested that DVD and EST products were not close substitutes for the products based on content in the FSPTW, and consequently we were satisfied that it remained reasonable to define a price discrimination market limited to FSPTW movie rights.

to distribute their content to viewers, and it is the prospect of earning such fees (among other things) that gives content suppliers the incentive to produce the content.

4.31 As noted above, in the course of our inquiry we assessed all relevant levels of sup- ply, ie the rights level, the wholesale level and the retail level (see paragraph 4.4). However, as the demand for wholesale services and for FSPTW rights is ultimately derived from a demand by consumers for retail services, we considered first the retail level, then the wholesale level, and then the rights level.