football trials

Page 1

Last January, to the evident relief of the Football

Association, BSkyB affirmed that broadcasting live

Premier League football matches was of fundamen-

tal importance to its business, and suggested it

would still be willing to pay up to £1 billion to

retain exclusive access to the rights it has held since

1992. This was good news to the FAPL, given fore-

casts that lack of competition in future rights auc-

tions - due to the collapse of ITV Digital and the

financial misfortunes of Telewest and NTL -

would result in the rights being sold for a much

lower value.

By some miraculous coincidence,

when the results of the FAPL’s latest rights auctions

were announced in August, £1 billion turned out

to be exactly what BSkyB will be paying, give or

take £20 million or so.

A key attribute of a well-designed, competitive auc-

tion is that it elicits bidders’ true willingness to pay

for the article being sold, and the FAPL’s recent

auctions certainly seem to have achieved this, at

least in BSkyB’s case. It is unusual, however, for a

bidder as savvy as BSkyB to announce their will-

ingness to pay to the seller months in advance, and

equally unusual for an auction to achieve this result

in the absence of any real competition. Yet this is

what has happened in the recent Premier League

rights auctions.

To recap briefly, under pressure from the European

Commission, in June the FAPL changed the for-

mat of its auction for the broadcasting rights to live

Premier League games by splitting the TV rights

into three packages: a Gold and a Silver package

with 38 games each, and a Bronze package of 62

less valuable games.

Further pressure from the

Commission in July resulted in a split of the

Bronze package into two equal-sized packages. The

purpose of the Commission was to ensure that

there would be genuine competition for the pack-

ages, and that not all of the live rights would end

up under the control of single pay-TV broadcaster

(i.e. BSkyB). But all of this was to no avail. On 8

August it was announced that BSkyB had again

secured all of the live rights for a price of £1.024

billion, compared with the £1.2 billion it paid for

66 live games per season under the previous deal.

And there had reportedly been no competition at all

for the Gold and Silver packages, and very little for

the Bronze packages. Faced with BSkyB’s pre-

announced £1 billion offer, other potential bidders

evidently thought the game not worth the candle,

and stayed away.

position in the broadcasting of premium sports

BSkyB has now won the exclusive rights to broad-

cast live Premier League football in four consecu-

tive auctions, beginning in 1992,

and the

European Commission’s interventions have so far

had no effect. In September, Competition

Commissioner Mario Monti declared that the deals

were bad for competition and bad for consumers

and, if anything, strengthened BSkyB’s monopoly

content in Britain.

So what, if anything, should

the Brussels competition authority do now?

Football Trials

David Harbord and Stefan Szymanski

26 October 2003

Introduction

All three companies were competing bidders in the

FAPL’s previous rights auctions.

David Harbord is Director of Market Analysis Ltd. Stefan Szymanski is Professor of Economics at The Business School,

Imperial College London. This article will appear in the European Competition Law Review in February 2004.

The Gold package consisted of 38 games to be played

on Sunday at 4pm, the Silver package of 38 Monday

night games, and the Bronze package of 62 games on

Saturday at kick-off times of 1pm and 5.15pm.

See K. Binmore and D. Harbord “Toeholds, Takeovers

and Football,” European Competition Law Review, 21:

2, February 2000, for a discussion of previous auctions.

An issue which has already been at the heart of numer-

ous UK competition authority investigations. For

example, the Monopolies and Mergers Commission’s

investigation into BSkyB’s takeover bid for Manchester

United, 1998/9, the Office of Fair Trading’s 1999

Restrictive Trade Practices Court case against the

Premier League, and the Office of Fair Trading’s

Competition Act investigation into BSkyB, 2001/2002.

Page 2

In December 2002, the Commission’s Competition

Directorate issued a ‘Statement of Objections’ con-

cerning the Premier League’s sale of live football

broadcasting rights, particularly the FAPL’s joint

selling arrangements, which the Commission

argued are tantamount to price-fixing.

The

Commission was concerned that these selling

arrangements result in less than 30% of Premier

League matches being made available for live

broadcast and, when coupled with exclusivity,

ensure that only big media groups can afford to

acquire the bundle of rights. According to the

Commission, the FAPL selling arrangements lead

to higher prices, shut out competitors from key

content and potentially harm football fans since

they are offered less football on TV, or no coverage

at all if they do not subscribe to pay TV.

It is hard to see how the Premier League’s recent

auctions will have assuaged the Commission’s con-

cerns, even though the number of matches sold has

increased from 28% to 36%. Nearly two thirds of

the matches played will still not be available live to

TV viewers.

In 2001 the Commission had raised

similar objections to UEFA’s selling arrangements

for the Champion’s League competition and,

according to some press commentators, recom-

mended the solution agreed with UEFA as a tem-

plate for the Premier League’s recent auction.

Under the UEFA deal, the Champions League

probably the opposite of the truth. The

broadcasting rights are also split into packages, but

in a way that prevents any single broadcaster from

acquiring all of the packages,

and individual clubs

can auction off any unsold rights, thus avoiding the

recent FAPL debacle.

In a bizarre twist, in August the BBC came out in

defence of the FAPL (and BSkyB) and suggested

that the Commission’s continued threats to inter-

vene in the auction showed that it did not under-

stand the British television market.

But this is

Commission appears to understand all too well the

monopolised nature of pay-TV broadcasting in

Britain, made possible by the rights-selling arrange-

ments in question. The problem for the

Commission is that a “UEFA-style” approach is

unlikely to work well in the current UK environ-

ment. There are now simply too few bidders left in

the game who are willing to bid for rights. Forcing

the FAPL to sell its broadcasting rights to multiple

broadcasting companies is still a possibility, but it

will likely come at the expense of a significant

reduction in the amount paid for the rights and

hence football clubs’ revenues. This is an unpalat-

able alternative for the clubs which they will resist

fiercely. On the other hand, allowing the cosy bilat-

eral monopoly between the FAPL and BSkyB to

persist is clearly not in consumers’ interests.

Is there another way? We explore below two alter-

native remedies aimed at stimulating competition

in broadcasting markets and in the supply of rights,

and which may work better than anything so far

proposed by the Commission.

The Commission’s objections to date have focused

on the sale of all of the Premier League’s (or

UEFA’s) live broadcasting rights exclusively to a sin-

gle broadcaster. Absent this form of monopolisa-

tion, it has otherwise declared itself content that

any rights sold should be exploited exclusively by the

See the Commission’s Press Release, 20 December

2002, “Commission opens proceedings into joint sell-

ing of media rights to the English Premier League.”

The Commission also noted that lack of competition

may limit the packages of rights available for new

media technologies, such as the internet and 3G mobile

phones. In October 2003, BSkyB was awarded the right

to broadcast live FAPL matches over the internet.

Vodafone and 3 obtained the rights to show video high-

lights over 3G mobile phones.

In October, BSkyB was awarded the rights to broadcast

the 242 games not covered by its £1.024 billion deal

on a delayed basis, for a reported £60 million.

The Wrong Type of Exclusivity?

FOOTBALL TRIALS

Typically by splitting the ‘free-to-air’ and pay-TV rights

into separate packages.

The Guardian, 25 August 2003, “BBC Boss Defends

Sky Football Deal.”

Objections Unheeded

Page 3

broadcaster that purchases them.

That is, it is not

that the broadcasting rights are exclusive to the

broadcaster which acquires them which concerns

the Commission, rather that a single broadcaster

should end up as the owner of all of the rights

available.

The FAPL can now argue, with some justification,

that they have made packages of rights available to

multiple TV companies, and BSkyB simply had

the best bids. So long as the auction was conducted

fairly, the Commission should now be satisfied.

But does splitting the exclusive rights into multiple

packages really achieve anything, even if more than

one company comes away with a package of rights?

Some recent economic analysis suggests that the

answer to this question may be no, and it is

instructive to understand why this is the case. This

in turn requires some prior understanding of the

way in which exclusive broadcasting rights are

already being exploited by BSkyB in the British

pay-TV market.

Put simply, pay-TV companies in Britain compete

by acquiring the rights to broadcast programming

and selling subscriptions to viewers. There are two

types of pay-TV network currently operating in the

UK market: the satellite network run by BSkyB

with more than 50% of subscribers, and the local

cable networks largely owned by Telewest and

NTL. Each company offers various packages of

“basic” programming, one of which must be taken

by all subscribers, and so-called “premium pro-

gramming”- such as live Premier League football

matches and Hollywood films - which can be pur-

chased for an additional monthly fee.

Access to premium programming is widely viewed

as being crucial for attracting customers.

As the

first entrant in the pay-TV market, BSkyB early on

acquired the exclusive broadcasting rights to practi-

cally all of the Hollywood studios’ first-run films,

and to the majority of the major sports events avail-

able to pay-TV. BSkyB purchases these rights under

exclusive contracts with upstream rights sellers and

then resells the programming to its downstream

competitors (i.e. the cable companies) for variable,

or per-subscriber, fees.

For example, the FAPL has sold the exclusive rights

to broadcast live football matches to UK pay-TV

companies in periodic auctions since 1992. BSkyB

has so far always acquired these rights, and has

resold the programming to its pay-TV competitors

for a per-subscriber monthly fee. The implications

of these contractual arrangements for competition

and consumer welfare in the pay-TV market are key

to understanding the issues in the Commission’s

current proceedings against the FAPL.

In a recent article, Harbord and Ottaviani argued

that competition to supply premium programming

to consumers in the pay-TV market will be ineffec-

tive when resale contracts specify per-subscriber,

rather than lump-sum, fees.

Resale of premium

programming, such as Premier League football

matches, for per-subscriber fees allows the firm

which acquires the exclusive rights to prevent the

dissipation of monopoly profits by increasing the

marginal cost of its competitor, i.e. by raising rivals’

costs, while simultaneously increasing the opportu-

nity cost of serving its own customers. This

increased opportunity cost has exactly the same

effect as an increase in the reselling firm’s marginal

costs, and gives both firms an incentive to increase

their retail prices to monopolistic levels. The resale

price thus acts as an effective mechanism for relax-

FOOTBALL TRIALS

See Monopolies and Mergers Commission “BSkyB and

Manchester United: Report on Proposed Merger,”

HMSO, London, 1999 for evidence. Also M.

Armstrong “Competition in the Pay-TV Market,”

Journal of the Japanese and International Economies, 13,

257-280, 1999.

D. Harbord and M. Ottaviani “Contracts and

Competition in the Pay-TV Market,” London Business

School Discussion Paper in Economics, July 2001. See

also D. Harbord and M. Ottaviani “Anticompetitive

Contracts in the UK Pay-TV Market,” European

Competition Law Review, March 2002.

Exploiting Exclusive Rights

See Torben Toft “TV Rights of Sports Events,”

Brussels, 15 January 2003 and Miguel Mendes Pereira

“Scope and Duration of Media Rights Agreements:

Balancing Contractual Rights and Competition Law

Concerns,” Brussels, 10 October 2003.

Page 4

ing downstream price competition and extracting

consumer surplus from the premium product,

depriving consumers of the benefits of competi-

tion.

If instead the premium programming were sold by

downstream firms who faced “uninflated” marginal

costs, i.e. if each firm acquired the nonexclusive

rights for a lump-sum fee from the rights seller,

fierce downstream competition to sell the program-

ming to consumers would result in these profits

being competed away, and the benefits captured by

consumers.

These observations suggest that one remedy for the

competition problems identified by the

Commission would be to regulate the way in which

FAPL rights are sold and resold. Imposing a ban on

the sale of exclusive rights would ensure that every

pay-TV broadcaster had access to the programming

on the same terms as its competitors, and con-

sumers would benefit from competition to ‘sell’ the

programming in the downstream TV market.

On the other hand, splitting the exclusive rights

between multiple broadcasters, as in the “UEFA-

style” approach, simply creates multiple down-

stream monopolies in the place of one, and has no

effect on pricing, profits or consumer welfare in

the Harbord and Ottaviani analysis. From the

point of view of consumers it does not differ from

the case in which the exclusive rights are all sold to

a single firm.

Another conclusion of Harbord and Ottaviani is

that an upstream rights seller, such as the FAPL,

will usually prefer to sell broadcasting rights exclu-

sively to downstream firms, rather than nonexclu-

sively to all firms. Exclusive sale - followed by resale

- maximises the monopoly rents available for distri-

bution between the upstream seller and the down-

stream retailer which acquires the rights, while

nonexclusive sale typically extracts less surplus for

both upstream and downstream firms. Hence a

move to ban the sale of exclusive rights by the

Commission would likely be resisted by both the

FAPL and downstream pay-TV companies.

While a ban on the sale of exclusive rights would

increase competition between broadcasters for those

rights placed on the market, thus benefiting con-

sumers who would pay lower prices to view live

football matches, it would not necessarily address

the restriction of choice created by collective selling.

As noted by the Commission, the FAPL acts as a

tight cartel which sells the rights to the matches

played by all of the Premier League clubs and shares

the revenues between them according to a fixed for-

mula. Individual clubs cannot sell the rights to the

matches they play on their own behalf, even if the

matches will not otherwise be broadcast.

The Commission’s objection to these collective sell-

ing arrangements is that they limit media coverage

of soccer events by restricting the number of live

games available to broadcasters to a small percent-

age of the matches actually played. Neither a

UEFA-type solution, nor a ban on exclusive selling,

would necessarily ensure that more live games are

made available for broadcast by TV companies. A

ban on collective selling may be the only sure way

to achieve this.

The FAPL has long argued, in defence of its output

restriction, that any increase in revenues from sell-

ing additional rights would be offset by loss of

attendance at the matches (i.e. in gate receipts).

This issue has been the subject of a study by

Szymanski et al. who provide econometric evidence

suggesting that the argument is specious.

What

D. Forrest, R. Simmons and S. Szymanski

“Broadcasting, Attendance and the Inefficiency of

Cartels,” Imperial College London, 2003. See also S.

Szymanski “Collective Selling of Broadcast Rights to

Sporting Events,” International Sport Law Review, Issue

2, Volume 1, 2001.

Similar anticompetitive effects have been shown to hold

in some closely related economic models, such as in the

literature on ‘raising rivals’ costs’ and in the patent

licensing literature. See, for example, S. Salop and D.

Scheffman “Cost-Raising Strategies,” Journal of

Industrial Economics, 41(3), 1987 and C. Shapiro

“Patent Licensing and R&D Rivalry,” American

Economic Review Papers and Proceedings, 75(2), 1995.

The nonexclusive sale of rights is not as novel as it may

appear, and has occurred already in the sale of FAPL

pay-per-view rights. Following the FAPL’s auctions in

June 2000, NTL returned the exclusive pay-per-view

rights it had acquired for a bid of £328 million. The

Premier League subsequently licensed the rights nonex-

clusively to each downstream pay-TV company for a

fixed payment.

FOOTBALL TRIALS

Inefficient Cartels

Page 5

Szymanski et al. show is that live broadcasts proba-

bly have negligible effects on match attendance,

and so the additional revenues generated by selling

more broadcasts would likely far exceed any plausi-

ble opportunity cost. If this argument is correct,

the FAPL is clearly failing to maximise the joint

profits of its member clubs. Szymanski et al. argue

that one reason for the failure to maximise cartel

profits derives from the FAPL’s own distribution

formula, which pays only 25% of broadcasting

income to home teams - a sum which the clubs do

not consider large enough to justify the risk of lost

gate. In effect, the FAPL is running an inefficient

cartel which implies that the Commission should

be wary of any remedy which preserves the right of

the FAPL to control which matches are and are not

broadcast.

One remedy for this inefficiency - which harms

consumers as well as football clubs - would be an

outright ban on selling broadcasting rights collec-

tively, i.e. a finding that the FAPL is an illegal car-

tel. Clubs would then be forced to sell the media

rights to their games individually. Individual selling

of rights could be achieved in a number of ways:

(A)

Clubs could offer their matches directly

to distributors for sale as pay-per-view

matches.

(B)

Each club could set up its own club

channel and sign a distribution deal

with distribution platforms (i.e. satel-

lite and cable).

(C)

Each club could sell its rights in a

wholesale market to intermediaries who

would then assemble rights packages

for sale to distribution platforms.

Option (A) is essentially what occurs in Italy, where

all matches are made available as pay-per-view.

Option (B) is like the situation in Major League

Baseball in the United States, where most clubs run

their own channels. Option (C) is as yet untested,

but might prove difficult to implement unless there

is genuine competition among broadcasters.

Not surprisingly, the FAPL has argued that individ-

ual selling of rights would have severe adverse con-

sequences for the distribution of income between

football clubs, even suggesting that some smaller

clubs might fold entirely under such a remedy. It is

true that the distribution of income from pay-per-

view sales in Italy has been highly skewed, with big

clubs able to generate up to EUR60m and small

clubs generating as little as EUR3m, and American

baseball has also struggled to find a mechanism to

balance the interests of the small and large teams.

Redistribution of income is feasible through mech-

anisms other than collective selling, however. While

Italian clubs postponed the start of the 2002 season

in a dispute over broadcasting revenues, major

league baseball clubs in America have managed to

agree on a “luxury tax” which obliges teams that

spend in excess of a fixed limit to pay a tax that is

redistributed to the smaller teams.

In any case, the central issue in the Commission’s

investigation is not collective selling per se, but the

FAPL’s restriction on the number of matches sold.

If the FAPL agreed to make available all of its

matches for live broadcast, then the Commission

might conceivably agree to the continuation of the

collective selling arrangement. What seems harder

to imagine is that the Commission can accept the

status quo in which nearly two thirds of matches

cannot be shown live, including some of those

which are most attractive to viewers.

FOOTBALL TRIALS

Originally, the Italian government passed legislation to

oblige these rights to be divided between at least two

platforms (with no platform controlling more than

60%), but now they have permitted the two satellite

platforms Telepiu and Stream to merge.

See, for example, R. Levin, G. Mitchell, P. Volcker and

G. Will, The Report of the Independent Members of the

Commissioner’s Blue Ribbon Panel on Baseball

Economics. NY: Major League Baseball, 2000.

For example, about one third of the matches of top

teams such as Manchester United, Arsenal and Chelsea

are not offered for live broadcast.

Page 6

The Commission has recently announced that it

will issue a second ‘Statement of Objections’ to the

Premier League, which suggests that the results of

the recent rights auctions may not be allowed to

stand. If so, the FAPL will need to implement a

new selling procedure that addresses at least some

of the Commission’s concerns. However, the

Commission’s “UEFA-style” approach to reforming

rights selling arrangements is unlikely - even if it

succeeds in distributing Premier League rights

amongst multiple broadcasting companies - to have

much effect on either competition or consumer

welfare in the British TV market. From one large

monopoly, two or three smaller monopolies will

have been created, not a huge step forward for a

competition authority.

The problem is that the Commission is tackling

the wrong kind of exclusivity. In order to improve

matters significantly, not only must the rights not

be sold exclusively to a single broadcaster, but the

same rights must be licensed nonexclusively to multiple

broadcasters (e.g. to each pay-TV company or plat-

form). Absent this remedy, consumers are unlikely

to benefit greatly from a reformed Premier League

selling procedure.

It can also be argued that the FAPL’s collective sell-

ing arrangements lie at the heart of the problem,

and the fact that organisations like the Premier

League act as inefficient cartels restricting output

and depriving consumers of the benefits of viewing

more football matches. In other countries, such as

Italy and Spain, football clubs sell their matches

individually. Reforms which fail to ensure that the

majority – if not all – of Premier League matches

are available on live TV will have stopped short of

achieving their goal.

One caveat is worth mentioning in closing. If exclu-

sive rights to broadcast live Premier League matches

can be sold to ‘free-to-air’ TV companies, such as

ITV or the BBC, this may partially succeed in

achieving the Commission’s objectives. At least

from the point of view of consumers this would

allow them to view some football matches for free,

thus reducing their reliance on, and hence willing-

ness to pay for, pay-TV. However, free-to-air broad-

casters face severe capacity constraints and can

broadcast only a small number of live matches per

season. The bulk of the rights will of necessity

remain with one or more pay-TV operators, a con-

straint which needs to be recognised in evaluating

any remedy for the competition problems identified

by the Commission.

Market Analysis

specialises in the application of economics to regulation, competition

policy and market design in the UK.

Europe and internationally.

For further information concerning our services

please contact David Harbord:

Tel:+44 (0)1865 883176 Fax:+44 (0)1865 731250

manalysis@aol.com www.market-analysis.co.uk

FOOTBALL TRIALS

Conclusions