TV wars: content and competition in pay-TV

Helen Weeds, University of Essex 5 th Workshop on Media Economics Bologna, 19-20 October 2007

Recent developments

 Digitisation expands transmission capacity  Undermines traditional source of market power  Platform proliferation  1990s (UK): cable and satellite  2000s: DTT and IPTV  Concern has shifted to control over content  Sport: “battering ram” of pay-TV  Movies 2

Cases

 UK  Wholesale supply of Sky’s premium channels   Sky-Virgin Media (VM) dispute over

Sky One

Ofcom investigations: pay TV comp’n; Sky on DTT  Europe (Italy, Scandinavia)  Exclusive contracts in satellite TV competition  USA  Cable overbuild and channel access  DirecTV contracts with sports leagues (NFL, MLB) 3

This paper

 Role of premium content in pay-TV competition  (When) does broadcaster with premium content have an incentive to withhold this from others?  Is exclusivity anti-competitive?

4

Related literature

 TV content and exclusivity  Armstrong (1999)  Harbord & Ottaviani (2001)  Stennek (2006), Hagiu & Lee (2007)  Licensing of a cost-reducing innovation  Kamien & Tauman (1986), Katz & Shapiro (1986), Jehiel et al (1996), Segal (1999)  TV competition with advertising  Anderson & Coate (2005), etc.

5

Outline of talk

 Modelling TV competition  Incentives for exclusivity  Static model  Dynamic platform competition  Implications 6

Industry structure

 Programme production  Channel packaging  Transmission (“platforms”)  Retailing & revenue generation 7

Industry features

 Differentiation  Horizontal: platform; basic channels; other services  Premium content  Platform competition  Single-homing and switching costs  Economies of scale  Transmission networks  Programme production  Building market share yields future as well as current benefits 8

Model of TV competition

 Broadcasters

i

= A, B  Supply channels to viewers  Compete in prices  Advertising  Horizontal differentiation  Consumers uniformly distributed on [0,1]  Broadcasters exogenously located at {0, 1}  Transport cost

t

> 0 9

Model (2)

 Viewer utility:

u i

=

v i

– 

n i

–

p i v i n i

= quality = advertising intensity,  = ad disutility

p i

= price  Basic channels:

v

0  0 (symmetric)  Premium channel, held by A  Highly attractive: value to viewers =

v

 No substitutes, difficult to replicate 10

Contracting

 A’s choice  Exclusivity  Non-exclusivity: contract with B  A makes take-it-or-leave-it offer  Two-part tariff:

F

+

cs B

 Eqm

c

=

v



F

> 0 extracts remaining surplus  Ad revenue

r

(per sub.) accrues to A 11

Static outcome

 Non-exclusivity  Gain from excl.

G

0 < 0  Viewer surplus lower (eqm price =

t

+

v

)  Welfare higher  Comparative statics 

dG

0 /

dt

< 0 (harder to attract rival subs) 

dG

0 /

dv

< 0 (greater opp. cost of forgone fees) 

dG

0 /

dr

< 0 (greater opp. cost of forgone viewers) 12

Discussion

 Per-sub fee   Softens retail competition Internalises seller’s ad revenue

r

 Regulate to reduce fee?

 Content creation & investment  Efficient contracting  All viewers receive content (efficient allocation)  C.f. licensing a cost-reducing innovation 13

Platform competition

 Dynamic aspect (reduced form)  Future profit increases with current market share

b

(

s i

) s.t.

b'

> 0,

b''

> 0  Motivation 

s i t

+1 and

p i t

+1 both increasing in

s i t

 E.g. models of switching costs, network effects, quality investment  (ignore advertising) 14

Solving the model

 Quadratic form:

b

(

s i

) = ½ 

s i

2  Parameter restrictions  (concavity of

π

fn) 0 <  < 4

t

 (competitive mkt)

t

> 3

v

 Gain from exclusivity

G

 4  3

t v

   2 

v

 4

t

   3

t

   2  15

Properties of

G

1.

 critical value of  such that  below this,

G

< 0  above this,

G

> 0 2.

 critical value of

v

such that  below this,

G

< 0  above this,

G

> 0 3.

G

is decreasing in

t

16

Interpretation

Exclusivity more likely when

1. Strong platform competition

 Dynamic benefit > opp. cost of distn fees  Examples   War of attrition: Italy, Scandinavia Growth of new platforms, multi-channel TV: build installed base 17

Interpretation (2)

2. More valuable (“premium”) content

 Trade-off between  Forgone distn fees: increasing in

v

 Dynamic benefit: asymmetry in

s i

widens in

v

 As

v

increases, 1 st then 2 nd effect dominates  Importance of premium content, especially popular sports 18

Interpretation (3)

3. Less differentiated distributors

 Easier to attract rival’s subs  Lower opp. cost of forgone distn fees  Easier to build market share: strengthens

b

effect  Intra-platform compn (satellite-satellite)  low

t

 exclusivity  Inter-platform compn (satellite-cable)  higher

t

 non-exclusivity 19

Discussion

 Role of exclusive content  

v

creates initial asymmetry:

s A

> Prices are decreasing in

b

′

s B

  Convexity:

b

′(

s A

) >

b

′(

s B

) A cuts price more than B, building share further  initial asymmetry is enhanced  NB  Cannot be achieved through prices alone  No scope for cost reduction: mc = 0 20

Welfare and antitrust implications

Depends on nature of dynamic effect  Exclude rivals  Switching costs: build installed base  Future prices higher for larger base  Distortion of platform choice: additional inefficiency  Programme investment  Enhance own & weaken rival’s incentives to invest  Market entry strategy 21

Future developments

 Digital switchover  Development of IPTV  Internet 22