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Analysts doubt Ofcom's price cut impact
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Thumbs up Analysts doubt Ofcom's price cut impact - 01-April-2010, 22:10

Analysts doubt Ofcom's price cut impact

Thursday, April 1 2010, 12:20 BST

By Andrew Laughlin,

Analysts have claimed that Virgin Media and BT are "unlikely" to be offering cheap Sky Sports 1 and 2 from next season, despite Ofcom's new pricing model.

Yesterday, the media regulator ordered Sky to reduce the wholesale price of each sports channel by 23.4% for rival operators.

Ofcom claimed that the new system is effective immediately, meaning Virgin Media, BT Vision and Top Up TV would be able to offer the channels at reduced prices in time for the 2010/11 Premier League season.

However, analysts at Citi believe that the situation is "unlikely" to come to fruition as Sky has already signalled its intention to launch a legal challenge against the ruling.

"Sky will appeal to the Competition Appeal Tribunal and will also ask for a 'stay' to delay implementation of the new pricing," said the firm in a note to clients.

"Even if a 'stay' is not achieved we argue that with the practicalities of getting the technology set up correctly and reaching agreements on conditional access (coding to avoid piracy) it is unlikely that new retail offers on sports will emerge before the new football season."

Citi instead believe that Sky will use the delay to drive up subscriptions to its own television packages, which could help increase its share price by up to 10%.

The analysts also noted that Ofcom's new 17.14 price for a bundle of Sky Sports 1 and 2 is lower than the 15 proposed in its consultation document published last year.

According to the firm's estimates, the price means that Sky's rivals will need to offer packages at around 28, potentially driving consumers over to Sky's own bundles.

"The price point for the sports [channel] mix has been the focus and this is much better than the market expected," said Citi.

"We believe this will allow Sky to maintain its competitive advantage in triple-play [TV, broadband and landline] and spin-down [to cheaper packages] will be limited."

The firm also noted that Sky has gained an "unexpected positive" from Ofcom's decision not to enforce a pricing model on its high definition sports channels. After accepting that HD is a relatively new innovation, the watchdog instead told Sky to make its HD channels available on "fair, reasonable and non-discriminatory terms".

In response to the HD stance, analysts at Execution Noble said: "Ofcom's pay-TV review conclusions will have a minimal impact on Sky.

"We believe that exclusive standard definition as opposed to HD or high definition content is no more an important driver of growth, and we focus our attention on new technology developments, specifically on HD and video on-demand."

Sky's rivals have also expressed concern that the firm will get around Ofcom's pricing by shifting Premier League games to other channels, such as Sky Sports 3 and Sky Sports 4.

Reacting to the new pricing structure, Virgin Media chief executive Neil Berkett said that it is a "step in the right direction" which should be welcomed by sports fans.

However, he warned that "significant loopholes" remain open, providing Sky with an opportunity to "further undermine competition".

Berkett added: "We look forward to working with both Ofcom and Sky to ensure our customers reap the benefits of increased competition as quickly as possible."

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