You are on page 1of 12

NON CONFIDENTIAL VERSION

COMPETITION COMMISSION MOVIES ON PAY TV MARKET INVESTIGATION VIRGIN MEDIA 1 RESPONSE "SIGNIFICANCE OF MOVIES TO THE PAY-TV RETAIL MARKET" WORKING PAPER 14 1. 1.1 INTRODUCTION AND SUMMARY In this submission, Virgin Media responds to the working paper entitled "Significance of Movies to the Pay-TV Retail Market" (working paper 14 ("WP14")). The Competition Commission (the "Commission") has considered the following: (a) (b) consumer research; the number of Sky Movies’ subscribers, amounts paid by consumers for Sky Movies and the level of viewing of Sky Movies; and views of pay TV retailers about the significance of movies in attracting customers to their platform.

(c)

1.2

In relation to consumer research, the Commission notes that the evidence shows "mixed results, but most of the consumer research appears consistent with a view that Sky Movies is significant to about 10 per cent of all pay-TV subscribers." 2 Virgin Media considers that this statistic does not represent the true proportion of consumers who consider movies within the pay TV retail market to be significant. Virgin Media notes that the Commission is likely to assess the significance of Sky's movies channels to the pay TV retail market particularly by reference to consumers’ decisions about whether or not to subscribe to pay TV, and to their choice of pay TV provider 3 . In this regard, a key characteristic of the pay TV market is that retailers offer bundles which contain a variety of channels containing different types of content. Retailers can potentially extract more willingness to pay by setting an aggregate price for a bundle, despite consumers attaching different values to different elements of the bundle. 4 Retailers may also have incentives to bundle in order to make it more difficult for a competitor offering standalone channels or smaller bundles to attract customers. The surveys cited in WP 14 do not, however, capture the implications of retail bundling. In particular, they do not address the way in which the availability of Sky's Movie channels can influence consumer choices of pay TV package and provider . Virgin Media considers, therefore, that the survey results significantly understate the significance of Sky's Movie channels to the pay-TV retail market because they do not reflect the importance of these channels in assembling attractive retail bundles. Notwithstanding this point, the finding that about 10 per cent of all pay-TV subscribers do consider movies to be significant should not be dismissed as low. Indeed, while Virgin Media considers this 10 per cent figure to be an underestimate, it nonetheless considers this to be a relatively high proportion of all pay TV subscribers in the context that about one-third of all pay TV consumers, and about half of Sky’s DTH customers, subscribe to

1.3

1.4

1.5

1

This submission is made by Virgin Media on behalf of itself, Virgin Media Limited and Future Entertainment S.A.R.L ("FES", trading as Virgin Media Entertainment), the latter two each being a subsidiary of Virgin Media Inc. Any reference to "Virgin Media" contained in this submission is a reference to Virgin Media Inc., Virgin Media Limited and FES. WP 14, Paragraph 3. WP 14, Paragraph 5. This was acknowledged by Ofcom at paragraph 4.99 of the Pay TV Statement.

2 3 4

1

this creates an incentive for Sky to limit the supply of its movie products to other pay TV retailers in order to prevent them from .2 2. 7 Virgin Media considers that this approach is likely to skew the results by erroneously focusing on only the content which consumers indicate is of the greatest significance in driving their choice of pay TV retailer. WP 2. if consumers choose their pay TV retailer for reasons unrelated to movies. the Commission should have explored whether the consumer value associated with movies in the FSPTW is sufficient to make packages containing these movies more attractive as compared to packages without these movies. 1.1 RETAIL BUNDLING AND THE SIGNIFICANCE OF SKY MOVIES The Commission explains the role of evidence in WP14 in its paper on "Theories of Harm (Working Paper 2).8 (b) (c) (d) 2. then the ability of rivals to compete will be limited. a considerable proportion can be expected to value other content (in particular sports) more highly.3 2. WP 2. Section 4 provides brief comments in relation to the Commission’s findings on the amounts paid by consumers for Sky Movies and the level of viewing of Sky Movies.7 1. Moreover. 1. In other words.6 In order to assess the competitive effects of retail bundling.5 This memorandum is structured as follows: (a) Section 2 discusses retail bundling and how the consumer research cited by the Commission inadequately captures consumer value for movies within bundles (where movies may be of lesser importance than other content but still important in driving demand for pay TV). 2.NON CONFIDENTIAL VERSION Sky Movies and.4 5 6 7 2 . The Commission indicates that one of the steps which is required in order to establish the Commission's theory of harm is that "pay-TV movie content in the FSPTW is significant to consumers in choosing their pay-TV retailer". bundling advantages can arise notwithstanding that the channels that go into the bundle are not all of the same value or importance in driving take-up. . of these. This section also considers the implications of bundling for effective competition. and how the survey evidence is not informative in this regard. there are few substitutes for movies and third parties cannot replicate movies channels). Section 3 provides detailed comments on the consumer research results which are cited by the Commission. If these bundling advantages are not replicable by competing pay-TV retailers. footnote 13. paragraph 17(b). then Sky’s incentive to limit the supply of its movie products to other pay-TV retailers is unclear (even if Sky has market power. 6 The Commission remarks that. 2. Because of the importance of retail bundling in the pay TV market. and Section 5 summarises Virgin Media's views on the significance of movies in attracting customers to its business which do not appear to have been addressed by the Commission in WP14. certain content may be very important for pay TV retailers to offer (as part of a bundle) even though consumers may not characterise this content as being "significant" or “most significant” in their choice of pay TV retailer.

NON CONFIDENTIAL VERSION assembling attractive rival bundles (even if movies are not. and (b) Sky Movies did not cost much extra. for certain customers. Appendix 1 also shows that. where consumers which value the core element of the bundle relatively highly (say sports) also value other elements of the bundle (say movies) relatively highly). it is unable to compete with the incumbent's bundle unless it is able to compensate for the benefits foregone from not having access to other elements of the bundle (which might be valued less than the content offered by the rival).8 2. that Ofcom's 2008 willingness to pay survey indicates that about half of subscribers to bundled premium packages contain both movies and sports (which are taken by the vast majority of Sky Movies subscribers).6 In Ofcom's Pay TV Statement (and previous consultation documents). Virgin Media considers these examples to be highly relevant . Standalone rivals without access to movies would be inhibited in their ability to compete because they would have to compensate for the absence of movies from their bundle (even though movies may not be crucial to the choice of retailer in the sense that Ofcom's Pay TV Statement. (a) Virgin Media discusses some simple examples which demonstrate the strategic effects of bundling. paragraph 4. Ofcom states that "there is a form of implicit price discrimination. despite each attaching different value to different elements of bundle. Virgin Media notes. 2. there may be detrimental effects on competition if rivals are unable to replicate these bundling efficiencies.e. WP 14. where the relationship between highly valued content and additional content is positively correlated.9 2. Consumers choose the package because (a) they wanted Sky Sports. Many consumers have a willingness to pay for movies as part of a package. the primary content driving take-up). bundling can distort choice among retailers for content which is considered to be more significant in driving subscriptions for a greater proportion of customers. bundling can be very effective in discouraging entry or making it more difficult for a competitor offering standalone channels or smaller bundles to attract customers. If it is difficult or impossible to replicate these other channels. even if movies are not considered to be the most significant driver of their choice of pay TV retailer. a number of consumers may be willing to pay the same aggregate price for a bundle. competing retailers are at an insurmountable disadvantage. In such circumstances. however. This is notwithstanding the fact that sports-only premium packages are available as an alternative. 9 More importantly. Paragraph 14. For example.7 2. which relies on the fact that retailers are likely to attract more consumers by retailing bundles which contain a variety of channels containing different types of content. In these circumstances. even if a rival has access to content which many customers consider to be of high value. More specifically.5 In this section. Ofcom discussed possible price discrimination benefits arising from bundling leading to greater availability of content than would otherwise be the case. 2. (b) Balancing bundling efficiencies and anti-competitive effects 2. there are very limited or no price discrimination benefits from bundling." 8 Appendix 1 of this submission provides a simple example which shows that.99. for example. (i. even in the presence of such price discrimination benefits.10 8 9 3 . and Virgin Media discusses how the survey results cited by the Commission fail to assess the importance of Sky Movies in influencing choices among competing bundles.

but this is not to say that these subscribers would prefer a package without Sky Movies over one which did. a considerable proportion can be expected to value other content (in particular. Whether or not consumers consider movies to be significant in their choice of pay TV retailer is not directly relevant to this question. Equally. as discussed below: Survey finding: among all pay TV subscribers the availability of movie channels constituted a main decision factor for 6 per cent of customers (8 per cent for Sky subscribers) – paragraph 10 • Virgin Media agrees with the Commission that the single most important reason to subscribe to pay TV. in particular.12 2. rather than seeking to establish whether it is significant. Indeed.NON CONFIDENTIAL VERSION the valuations placed on movies may. on a standalone basis. or indeed the most significant determinant. could have encompassed the desire to access movie channels.13 2. for certain customers. 4 2. As explained above. 3. and yet rivals would not be able to compete effectively without access to this content (even if they did have access to content which may appear to be a stronger determinant of retailer choice). Limitations of survey findings 2.e. the finding that about 10 per cent of all pay-TV subscribers do consider movies to be significant should not be dismissed as low. Ofcom's consumer research 3. Many of these subscribers may value other elements of their package more than Sky Movies and would therefore be disinclined to switch package. so consumers are unable to "try before you buy"). As noted above. movies can still be an important determinant of choice of package even where customers consider other elements of the package to be of greater significance.14 3. .11 In light of the above. movies may be of lesser importance for many customers in driving subscription choices.2 Virgin Media agrees with many of the concerns identified by the Commission in relation to the reliability of Ofcom's consumer research. CONSUMER RESEARCH As indicated above. Virgin Media also considers that customers citing this as a reason are likely to have used the range of channels available on a platform (particularly the availability of movies) as an indicator of platform quality in circumstances where they may not have subscribed to a pay TV service from this platform before. the finding that a substantial proportion of Sky Movies subscribers would not switch in the event that their provider ceased to offer Sky Movies does not indicate that Sky Movies is un-important to these subscribers. The importance of movies needs to be assessed in this context. sports) more highly. whether rivals need to replicate the bundling advantages available to Sky across content types including movies in order to compete effectively. it nonetheless considers this to be a relatively high proportion of all pay TV subscribers in the context that about one-third of all consumers to pay-TV actually subscribe to Sky Movies and. of these. and where it is difficult to sample the service before purchasing (i. to recover the costs of equipment and installation. be relatively small compared with the valuations for other content which may be more significant in driving subscriptions). Virgin Media considers that the Commission should focus on the role of movies in allowing pay TV retailers to assemble attractive retail packages and. many pay TV platforms have minimum contracts. while Virgin Media considers this 10 per cent figure to be an underestimate.1 . namely having access to more channels (52 per cent among all pay-TV customers). .

• • Survey finding: among all those consumers who regard programming and channels as an important feature in their choice of TV service. 5 . This position is supported by the survey finding that a proportion of Sky's premium channels subscribers chose Sky 10 Slide 15 of the Commission’s consumer research.NON CONFIDENTIAL VERSION • Virgin Media notes. Ofcom uses this survey finding to reach the conclusion that "around 40 per cent of Sky premium subscribers…see movies as an important part of their subscription" (Ofcom's Statement. Virgin Media agrees that it is difficult to infer from these results the importance of movies in driving choice of pay TV provider because respondents were asked to choose amongst types of programme or channel many of which are available free. The single most important reason given for subscribing to a pay TV service was greater choice of content (given spontaneously by 60 per cent increasing to 69 per cent with prompting) 10 . of those who subscribe to Sky Sports and Sky Movies (the most popular premium movies package for both Sky and Virgin Media) just under half said they subscribed primarily for Sky Movies or saw Sky Movies as being as important as having Sky Sports. and none of the survey evidence addresses this issue directly. this evidence might reflect a lack of awareness among customers of services offered by rival providers. para. This association will have become increasingly important since Ofcom carried out the survey in 2009 given that VOD was not well established on Sky’s platform and that the take-up of HD ready TVs has increased. This response could encompass a desire to access a greater choice of movie channels and hence little reliance can be placed on the finding that 7 per cent of all pay TV subscribers regarded movies as a reason to subscribe (increasing to 22 per cent after prompting). this is a key issue in assessing whether rivals can compete effectively with Sky if they are unable to access Sky Movies. VOD (6 per cent) and HD (4 per cent). that the same comment is applicable to the Commission's survey results (outlined in paragraph 36) as regards reasons for subscribing to pay TV. Ofcom's Willingness to Pay survey 2008 (which is described at paragraph 37 and in the Appendix at paragraph 7) indicates that. in this regard. Virgin Media considers it likely that subscribers citing the importance of these features. 8 per cent of all subscribers and 9 per cent of Sky subscribers believed Sky's movie channels to be one of the most important types of channel – paragraph 11 • Virgin Media notes that 65 per cent of all pay TV subscribers (71 per cent of Sky subscribers) considered programming or channels to be important in their TV service choice with the remainder citing other features. since only Virgin Media and Sky actually provide access to Sky Movies. • Survey finding: 8 per cent of Sky subscribers who had considered Virgin Media before said that they picked Virgin Media because they wanted to get Sky Movies – paragraph 12 • Virgin Media agrees with the Commission that.53). Virgin Media considers that Sky supplies its movies channels to Virgin Media on terms which do not allow Virgin Media to compete effectively. Virgin Media is also unsurprised that a sample which includes both basic-only and premium subscribers will have a lower propensity to cite premium channels as a key driver of their subscription decision. namely. were attracted by these features due to the benefit of viewing Sky Movies via VOD or in HD. Virgin Media also agrees with Ofcom's observation that these survey results cannot be interpreted as indicating how important Sky Movies would be to a household choosing between two pay-TV providers if one of the providers offered Sky Movies and the other did not. . In Ofcom's Statement. interactive (12 per cent). particularly VOD and HD. As discussed above. 9.

49 per cent said that they subscribed to Sky Movies because they wanted Sky Sports and Sky Movies did not cost much extra.NON CONFIDENTIAL VERSION over Virgin Media because they wanted Sky's movie channels despite these channels also being available from Virgin Media. Virgin Media focuses on the findings which the Commission has highlighted as regards the significance of movies to the pay TV retail market. This is critical given that the vast majority of subscribers with an interest in movies content purchase bundles including both types of content. Virgin Media consider that limited reliance can be placed on results in relation to sample sizes less than 100. Survey finding: 8 per cent of Sky Movie subscribers said they would switch to a different pay-TV provider and 32 per cent to FTA services in the event that Sky Movies was no longer available – paragraph 13 • Virgin Media notes the sample of 54 for this question. The remainder value the package primarily for Movies (22 per cent) or value both Sky Sports and Sky Movies (25 per cent). Commission consumer research 3. movies and sports together). Survey finding: among all pay TV subscribers. The evidence suggests that half the subscribers take the package primarily for sports but. Survey finding: subscribers are willing to pay a substantial premium for access to different premium channels such as movies and sports – paragraph 14 • Virgin Media notes that the Commission has not cited the survey evidence from Ofcom's 2008 Willingness to Pay survey which supports this point. 22 per cent subscribed to Sky Sports because they wanted Sky Movies and Sky Sports did not cost much extra and 25 per cent said that they wanted both Sky Movies and Sky Sports – paragraph 14 • Virgin Media considers that this result is highly significant because it explores preferences amongst those subscribers who are motivated by both sports and movies. As the Commission is aware. as noted above. smaller sample sizes carry wider error margins. the single most important reason given for subscribing to a pay TV service was "greater choice of TV" (given spontaneously by 60 per cent increasing to 69 per cent with prompting). In its response to WP 10. It is clear simply by considering relative retail prices that Sky Movie subscribers are willing to pay a significant additional amount each month (over and above a basic subscription) in order to have access to Sky Movies. Virgin Media considers this to be a key indicator that consumers consider premium channels to be distinctive and highly differentiated from basic content. Little reliance can by placed on the responses given in relation to Sky Movies since respondents indicating "greater choice of TV" might have intended this to encompass the importance placed on access to Sky Movies.3 As a general comment. Virgin Media has addressed these concerns in detail in WP 10. Survey finding: of the subscribers who signed up for bundled premium packages (i. which are anomalous and unexpected in some important respects. 6 . these subscribers also value Sky Movies (albeit to a lesser extent) such that an attractive stand-alone sports package from a rival retailer might not be able to compete unless significant discounts are available for the forgone benefits of Sky Movies. 7 per cent first decided to subscribe to a pay-TV service in order to be able to watch more movies (unprompted response increasing to 22 per cent with prompting) – paragraph 36 • As noted above. Virgin Media is concerned by the results of the Commission's survey.e.

As noted by the Commission. 4. Virgin Media considers that the proportion of subscribers to Sky Movies who indicate that Sky Movies is "not very" important (26 per cent) are likely to value other elements of their package more highly. that the Commission should produce a range of estimates with the lower band being the minimum value estimated in the working paper. The Commission needs to take into account the range provided by the prompted and unprompted responses rather than placing emphasis on the lower band which can be expected to be under-stated. Virgin Media considers this to be a key indicator that 7 . It does not appear that this was investigated by the survey. Virgin Media notes. As discussed above. however. therefore. although 65 per cent of Sky Movies subscribers indicated that they would not switch. NUMBER OF SKY MOVIES SUBSCRIBERS. with 34 per cent regarding it as quite important (11 per cent of all pay TV subscribers) – paragraph 37 • Virgin Media notes that a sizeable proportion (51 per cent) of Sky Movies subscribers considers Sky Movies as being very or quite important to their subscription decision (17 per cent for all pay TV). this is likely to reflect subscribers who are prepared to lose the Sky Movies element of the bundle provided they can still take Sky Sports. the ability of retailers to offer bundles which appeal to customers with this balance of preferences is still important in assessing the effectiveness of retail competition. that there is some uncertainty as to the minimum value for the reasons set out in paragraphs 47 to 48. This is important and is entirely consistent with the fact that Sky Movie subscribers pay a substantial premium in order to gain access to movies in the FSPTW. and 4 per cent saying they would cease to subscribe altogether – paragraph 37 • Virgin Media considers that. Virgin Media is unable to comment on the values derived by the Commission due to redactions.2 Virgin Media notes that Sky Movies is responsible for a slightly greater share of viewing than FTA movie channels as set out at Figure 3 of WP 14.1 Virgin Media notes that the Commission has sought to estimate minimum willingness to pay for Sky Movies channels in paragraphs 44 to 50 of WP 14 on the basis of incremental prices and data from the 2008 Willingness to Pay survey. Virgin Media would suggest. however. .NON CONFIDENTIAL VERSION • Virgin Media also notes that the proportion of respondents indicating that they decided to subscribe to pay TV in order to watch more movies increases significantly with prompting. which is only 2 per cent of all pay TV subscribers. Survey finding: 17 per cent of subscribers to Sky Movies (6 per cent of all pay TV subscribers) regard it as very important in their decision to have a pay-TV service. and the upper band a higher value which reflects the proportion of Sky Movies subscribers which are likely to have a higher willingness to pay than the incremental price. Only a relatively small proportion of Sky Movies subscribers (7 per cent) indicated that Sky Movies was not at all important. there are fewer viewers of Sky Movies compared with FTA movie channels suggesting more viewing per consumer on Sky Movies. 3 per cent saying they would switch to another provider without Sky Movies. with 12 per cent saying they would switch to another pay-TV provider. THE VALUE OF SKY MOVIES AND LEVEL OF VIEWING OF SKY MOVIES Value to consumer 4. however. Levels of viewing 4. Survey finding: 22 per cent of subscribers to Sky Movies (7 per cent of all pay-TV subscribers) would stop paying for their current TV service if their provider stopped offering Sky Movies.

. whilst important.1 (b) (c) It is clear from the sums paid by channel providers for content rights that premium content is key 13 . Virgin Media has also highlighted a number of previous decisions by the UK and EU competition authorities which highlight that premium movies and sports are key drivers of pay TV subscriptions.6-4. 11 .3 11 12 13 14 15 16 17 . do not make up for an absence of content that is attractive to consumers 15 (d) (e) 5. paragraph 4. paragraph 4. . 8 . 12 5. Response to the Commission's Issues Statement. paragraph 4. paragraph 4. The number of premium subscribers in the UK illustrate that there are significant numbers of consumers that are prepared to pay to acquire premium movie and sports content over and above basic packages. position are summarised in paragraphs 27 to 31 of WP14. Response to the Commission's Issues Statement. Virgin Media considers that the availability of Sky Movies drives pay TV uptake and retention.2 Certain of the evidence which Virgin Media has provided to the Commission to support this 16 . in respect of which Virgin Media estimates that premium movies feature in approximately per cent of Sky’s marketing – there is even a dedicated Sky Movies magazine. This is also reflected in the focus of Sky’s marketing efforts.4(b).NON CONFIDENTIAL VERSION 5. Response to the Commission's Issues Statement. Virgin Media has made the following arguments in this regard: (a) Premium movies are a key driver for consumers choosing pay TV over FTA.5. Response to the Commission's Issues Statement. Sky Movies is the only wholesale or retail movie proposition which has significant appeal to a broad audience and limited availability on FTA channels (indeed it is the only movie service in the UK in the FSPTW).7.4(a). VIEWS OF PAY-TV RETAILER ABOUT THE SIGNIFICANCE OF MOVIES IN ATTRACTING CUSTOMERS Virgin Media notes that WP14 does not reflect the views of Virgin Media about the significance of movies in attracting customers. 14 Platform features. 17 5.

generating total revenue of £24.NON CONFIDENTIAL VERSION APPENDIX 1: BUNDLING ADVANTAGES 5. the price would have to lowered to £2 (yielding revenues of £8 in total). a bundle priced of £12. generating total revenue of £20. Both consumers would buy a joint package priced at £12. the correlation is negative (consumer A's valuation for sports and movies are the mirror image of those of consumer B). Ofcom describes the examples as follows: "For instance.83. there is no association between valuations of the different products. whereas single packages priced at £10 each would only attract those consumers who valued the individual elements at £10. there are bundling efficiencies – the supplier will do better by offering a bundle than by offering the channels independently. Case two: bundling across products where there is positive correlation across consumer valuations Consumer A B C Sports £28 £16 £12 Movies £6 £4 £2 Bundle £25 £19 £14 Bundling efficiencies 5. As indicated in Ofcom's quote. consumers which value one element of the bundle relatively highly (say sports) also value other elements of the bundle (say movies) relatively highly and so on.7 In case one. will attract both consumers buying both 18 Ofcom's First Consultation Document. Case one: bundling across products where there is negative correlation across consumer valuations Consumer A B Sports £10 £2 Movies £2 £10 Bundle £12 £12 5. In order for the consumers to purchase both products independently.4 The example developed below is one cited by Ofcom to demonstrate the price discrimination effects associated with bundling. in which case consumer A would only purchase sports and consumer B would only purchase movies (yielding total revenues of £20). in this example. Indeed. paragraph 5. In other words. and another vice versa." 18 5.6 A further example is considered below where there is a positive correlation across consumers in their valuations of the individual components of content that are bundled together. 9 . The supplier would do better by offering each channel independently at £10. The valuations of the two consumers are summarised in the table below. however. one consumer may value sports at £10 and films at £12.5 It should be noted that.

(b) 5.NON CONFIDENTIAL VERSION channels yielding total revenues of £24.12 The incumbent could meet the competition either by: (a) mixed bundling – i. Consumer B would continue to buy the bundle – this consumer does not value sports sufficiently to pay £9. Customer A is happy not to switch to the rival as he now enjoys a surplus of £1 from buying the bundle 19 (which matches the surplus from switching). This would be more profitable.8 In case two. there are no efficiency benefits from bundling. The incumbent could retain both customers but Consumer A would only buy the sports channel (and there remains the risk that Consumer A would switch). in this example. Consumer Sports consumer value Movies consumer value Sportsonly rival (sports only at £9) A B Revenues £10 £2 £2 £10 £9 £9 Incumbent (unbundled sports £9. or lowering the price of the bundle – if the price of the bundle is dropped to £11 the incumbent will retain both customers.10 The table below shows possible incumbent strategies to entry by a competing provider of sports programming offering a price of £9. 10 . a surplus of £1). Responding to competition 5. If sports are priced at £12 and movies at £4.11 An entrant offering sports for £9 would affect consumer choices as follows: (a) Consumer A would take the rival offer – this consumer would gain a price reduction of £3 for a loss of movies valuation of £2 (i. all customers would buy sports and customers A and B would purchase movies (yielding total revenue of £44). Bundling. Total potential revenue would be £21. earning total revenue of £22. (b) 19 A valuation of £12 less the cost of £11. bundle sports/movies £12) £9 £12 £21 Incumbent (bundle sports/movies £11) £11 £11 £22 5. a bundling strategy can be used to deter entry. however. There is a profit maximising strategy whereby the channels are offered independently.e. The best that could be achieved by bundling the channels would be to offer a bundle at £14 which would be bought by all customers but would only yield revenues of £42. leads to greater supply (albeit all the efficiency gains are captured by the supplier). offering the sports channel at £9 and continuing to sell the bundle to Consumer B at £12.9 In both cases. Case one 5. 5.e.

Only once the standalone provider can undercut the bundle provider by a significant amount is it possible to break this advantage. If the incumbent offers the channels on a standalone basis. then a rival could undercut the incumbent by a small margin (for example by offering sports for £11) thereby winning all three customers for the rival sports channel. even though this would not be the profit maximising strategy compared to offering the channels independently.13 This simple example shows that the bundle provider has the ability to respond to competition on just part of its content range by absorbing some of the required price response on bundled channels rather than entirely on the channels subject to competition.18 The entrant would need to offer sports for just below £10 to get Customer B to switch and just below £8 to get Customer A to switch. Consumer Sports consumer value Movies consumer value Sports-only rival (£11 for sports channel) Incumbent (bundle sports/movies £14 £14 £14 A B C Revenue £18 £16 £12 £6 £4 £2 £11 £11 £28 5. only customer C would switch to the entrant.17 (b) (c) 5. as shown below. however. Summary 11 . Customer C would get a surplus of £1 buying the sports channel from the rival at £11. 5. This provides it with an intrinsic advantage over the standalone provider.16 5. he would give up surplus of £10 associated with the bundle to gain a smaller surplus of £7 from buying the standalone sports channel from the rival and so would not switch. it would dramatically reduce the chances of an entrant winning customers. If customer B were to switch. If the entrant sets a price of £11.14 The table below shows possible incumbent strategies to entry by a competing provider of sports programming offering a price of £11. Case two 5. If the incumbent offers a bundle priced at £14. as customers A and B would still be better off buying the bundle from the incumbent: (a) If customer A were to switch.NON CONFIDENTIAL VERSION 5.15 The incumbent would choose to offer a bundle of sports and movies at £14 because. he would give up surplus of £6 associated with the bundle to gain a smaller surplus of £5 from buying the standalone sports channel from the rival and so would not switch. it is much more difficult for a rival to attract customers away from the incumbent. as compared with no surplus from buying the bundle from the incumbent and so would switch to the rival.

bundling can be used to deny a competitor access to a substantial part of the customer base. In these circumstances.NON CONFIDENTIAL VERSION 5. in both cases. there can be efficiency benefits because bundling leading to greater supply. however. In order to attract customers. These need to be balanced against any entry deterrence arising from the reduced scope for rivals to attract customers. bundling efficiencies disappear and bundling is a particularly effective way of discouraging entry or limiting competition. This loss of profit.19 The key point in relation to these examples is that. however is small compared with the profit loss that the incumbent might suffer if a competing retailer could contest the entire demand for a core element of the bundle (in the example above. sports). 5.20 5. Where valuations are positively correlated as in case two. The difference between the two cases is that. where valuations are not strongly associated. a rival offering an element of the bundle on a stand-alone basis will not only have to be cheaper than the incumbent but will also need to compensate customers for the benefits foregone from not having access to other elements of the bundle (which might be valued less then the content offered by the rival). bundling leads to a loss of profit compared to offering the channels on a standalone basis.21 12 .