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5.56 In this subsection, we discuss the opportunities for new entry or expansion to make a significant difference to the existing market. We were concerned with large-scale entry or expansion as this had the potential to affect competition significantly rather - - -

10. We’ll install it for free and give you the first 2 months free too, if you call before 28th Feb.

Sky added that this example was from before the launch of Virgin Media’s new TiVo STB and its 100MBits/s broadband product, both of which had further improved Virgin Media’s product set and its effectiveness as a competitor to Sky. 49 _{http://corporate.sky.com/documents/pdf/latest_results/fy_press_release_1112.}

than niche entry, and we concentrated on subscription pay-TV services as these services were the focus of our assessment of pay-TV competition.50

5.57 We considered the following entry strategies:

(a) starting a new pay-TV platform;

(b) retailing via the platforms of existing pay-TV or FTA retailers;

(c) expansion by existing smaller traditional pay-TV retailers; and

(d) OTT pay-TV retailing. We discuss each in turn.

Starting a new pay-TV platform

5.58 We considered the possibility of entry as a new traditional pay-TV retailer by starting a new pay-TV platform, ie a service which includes access via a platform-specific STB/ PVR to a broad range of paid-for content offered at a variety of different prices. Content could be delivered to a new pay-TV platform using satellite delivery and/or delivery via a closed Internet connection (IPTV), as well as through DTT.51 _{We dis-} cuss first a new pay-TV platform using satellite or satellite/ IPTV delivery before dis- cussing the other forms of platform entry.

5.59 Ofcom’s evidence suggested that a potential entrant could launch a completely new satellite service as there was an available supply of satellite capacity.52 _Furthermore, even if the capacity on the existing satellites used for TV in the UK was fully utilized, satellite dishes could be changed to pick up signals from other satellites in other orbital positions. Therefore, there did not appear to be a significant technical con- straint on setting up a new platform using satellite delivery.

5.60 In considering entry, it is relevant to distinguish between, on the one hand, sunk and fixed costs, which are either irrecoverable or cannot be readily adjusted for changes in scale, and, on the other hand, per-subscriber costs and any other variable costs, which depend on the scale the entrant eventually achieves. As entrants inevitably face more uncertainty about their future scale than incumbents, and sunk and fixed costs cannot be adjusted to the scale an entrant eventually achieves, an entrant may face costs per subscriber which, other things being equal, are greater than those of incumbents. This disparity in costs can act as a barrier to entry. In the context of entry via a satellite or satellite/ IPTV platform, a potential new traditional pay-TV retailer creating a new platform would incur significant costs both in setting up its platform and in acquiring subscribers. In relation to the former, the new entrant would be likely to have to provide, or subsidize the provision of, receiving dishes and STBs as other entrants have done.

5.61 In relation to customer acquisition, we noted that, despite existing traditional pay-TV retailers incurring significant costs to acquire new subscribers, around 70 per cent of subscribers to traditional pay TV had not even considered changing their provider in

50 _{See Section 4.}

51 _{In principle, content could also be delivered over a dedicated physical network, such as that of Virgin Media. However, the} cost of constructing such a network would be extremely large.

52 _{Ofcom said that the possible exception was for capacity on Astra 2D. This is the only satellite that has a broadcast footprint} focused on the UK, allowing FTA broadcasters to control ‘overspill’ without the need to use Sky’s conditional access services (see Appendix 5.2, paragraph 6).

the two to three years prior to our December 2010 survey.53 _{We also noted data} showing that [].54 This made it likely that a potential large-scale new traditional

pay-TV retailer would need to incur substantial irrecoverable costs in marketing its service to subscribers. Furthermore, it was likely that the entrant would incur much greater marketing costs per subscriber than incumbents, as each of the incumbents had an existing subscriber base. It appeared to us that the need to incur large marketing costs was a significant barrier to large-scale entry as a traditional pay-TV retailer.

5.62 In a highly concentrated market, such as pay TV, a potential large-scale entrant would also need to consider the impact of its own entry on competition. In a number of countries (including the UK), competition between satellite pay-TV platforms appears to have been unsustainable, with the result that one or both platforms

encountered financial difficulty and the two platforms merged.55 _{The entrant may also} expect incumbents to respond by strengthening their offering and by seeking to retain their existing subscribers (ie a normal competitive response). Anticipation of such a competitive response from incumbents in the market might discourage entry. 5.63 A new entrant would also need access to content which consumers regard as the

most important aspect of a pay-TV service (see paragraphs 5.24 and 5.25). 5.64 Entry using non-satellite delivery would involve similar issues to entry by satellite

delivery. We noted that there could be some efficiencies and cross-selling opportuni- ties if the new entrant was already involved in the supply of telephony and broadband services but, clearly, the two largest telephony and broadband suppliers, BT Retail and TalkTalk, had already entered the pay-TV market, albeit so far on a small scale.

Retailing via the platforms of existing pay-TV or FTA retailers

5.65 Retailing via the platforms of existing pay-TV retailers would require the platform owners to grant access. We noted that Sky’s platform was required to be open to third party retailers, but other traditional pay-TV retailers’ platforms were not.56 _Sky said that because its platform was open, any entrant had the option to retail its chan- nel directly to a large addressable base (over 10 million households). Sky argued that this had two benefits for potential entrants: (a) it assured entrants of being able to reach a sizeable proportion of the UK population in the event that they were success- ful in acquiring rights; and (b) it gave them a strong bargaining position if they wished to negotiate a wholesale deal with Sky.

5.66 On the basis of the activities of those retailers which, currently or recently, had retailed their content on Sky’s platform, it seemed to us that entry via Sky’s platform was most plausible for an entrant with a narrow product range, eg a single channel or a group of channels. However, we noted that, in the past, this had not been a suc- cessful strategy by which to reach a large and sustainable number of subscribers; and we were not aware of any reason why it should become a more successful strategy for entry in the future.57 _{In particular, it appeared to us that an entrant retail-} ing over Sky’s platform would always be at a disadvantage to Sky because Sky had 53 _{See paragraph 5.38.}

54 _{See Appendix 5.1.}

55 _{In the UK, two satellite platforms were started in 1989/90. These merged to form Sky in 1990.} 56 _{See Appendix 5.2.}

57 _{See Appendix 5.2. Sky said that it would be erroneous to extrapolate from the fact that services retailed by third parties on} Sky’s platform were currently niche services, with small subscriber bases, to a view that this meant that it would not be feasible for a third party retailer to develop a significant subscriber base on Sky’s platform (if it provided a more mainstream channel offering). We disagreed with this view because Setanta’s mainstream UK channel offering was not successful and because of the views expressed to us by other retailers.

the primary relationship with its subscribers. In our view, wholesaling to Sky was likely to be more attractive to channel providers than retailing over Sky’s platform, due to the costs and risks associated with reaching Sky’s subscribers. We consider these issues further, specifically in relation to launching a service with FSPTW movie content, in Section 7.

5.67 Another possibility might be for a new entrant to retail via Freesat’s platform. We were told that Freesat receivers might, in the future, have a facility for conditional access and that Freesat might offer access to a retailer of pay-TV content. Ofcom survey data suggested that, at the start of 2012, there were around 0.5 million homes using Freesat for their main TV (see Table 2.1 in Section 2), and there were likely to be some other homes which had at least one of their other TVs connected to a Freesat STB.58 _{[] some existing Freesat users and a number of other consumers} [] had expressed an interest in a Freesat proposition including some unbundled

optional premium pay-TV services (ie without an enforced ‘buy through’ of basic channels). However, we did not see evidence of pay-TV providers generally having an interest in selling over the Freesat platform59 _{and we judged that most Freesat} customers were likely to have limited interest in pay TV given that Freesat customers had chosen a free TV service rather than a paid-for service in the first place. Overall, we did not believe that retailing via Freesat’s platform on its own was likely to enable large-scale entry or expansion in pay TV, though we recognized that, in some circumstances, it may give some assistance to entry or expansion based principally on another platform or other forms of distribution such as OTT.