BSkyB deal for Virgin Media channels goes to OFT
Samantha Oakes
20. Analyse the implications for consumers, competitors and advertisers of the proposed acquisition.
In the current oligopoly of the TV broadcasting industry, there is already a high degree of concentration, with just a few main firms servicing the majority of consumers.
The effect on consumers depends on the route that BskyB choose to take. They may decide that they want all of their customers to be running of the same system, so they can better benefit from economies of scale such as purchasing economies of scale. E.g. they could benefit by buying in bulk one style of set top receiver. This can decrease their average cost per unit, and therefore increase their profit margins. This would however mean some upheaval for the virgin customers during the time of the switch over. It would also entail a lot of investment from sky, in order to do so, and many of the virgin customers may actually choose to go elsewhere instead of dealing with sky. This may also mean that some virgin channels are cancelled, and replaced with sky channels which may disgruntle some customers. However the profit signal mechanism makes it unlikely that sky will remove any of the most popular channels. In this case, virgin customers are quite likely to receive additional benefits, such as more access to sports channels, especially football which sky owns the rights too.
Even if the two companies don’t merge together, and sky incorporates product proliferation in order to target more areas of the market, the virgin customers and possibly sky, are likely to see some changes. Popular channels are likely to be made available on both services, with the unpopular channels removed. This way, sky could still maintain the same quantity of channels, but would benefit from economies of scale by showing the same service. BskyB would therefore have a variety of options from these costs savings. They could a) accept the higher profit margin and pass these benefits onto the share holders, b) reduce their price in accordance with the cost savings. This would therefore benefit the consumers financially, and leave them with more discretionary income to spend else where. Or c) reinvest this money into drivers of competitive advantage in order to improve the service provided to the consumer. However, as their is currently limited competition, of which sky probably offers one of the best quality services anyway, and high barriers to entry due to the economies of scale sky has, particularly in relation to marketing, what incentive would sky have to increase the quality of their service? Possibly none at all. Therefore I would predict that sky are more than likely to keep the prices the same, but, will have a little extra margin in order to give discretionary discounts to the increasing amount of consumers considering switching to free view.
Consumers are also likely to notice that customer help lines etc will be merged together. As some people from sky, are likely to have to assist in virgin customer issues, the service is likely to be inefficient until they have had time to gain experience in the other provider and receive training.
News shows etc, may also become more biased in order to reflect sky’s, or Murdock’s views.
The final option for sky, which I believe is the one they took, is to close virgin down, and therefore eliminate a competitor from the market. The more competition is limited, the more price elasticity sky will achieve, as there won’t be many, if any, close substitutes. In the long run, what this means, is that without regulation, consumers could see their price of their service increasing, with quality remaining static, despite the technical innovations that are likely to occur. This however, is dependent actually on how quickly the quality of the internet improves. This may be what it takes to make sky give a better and cheaper service to consumers. Currently, most British households