TV wars: content and competition in pay-TV

Helen Weeds, University of Essex

5th Workshop on Media EconomicsBologna, 19-20 October 2007

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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

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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)

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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?

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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.

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Outline of talk

Modelling TV competition

Incentives for exclusivity Static model Dynamic platform competition

Implications

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Industry structure

Programme production

Channel packaging

Transmission (“platforms”)

Retailing & revenue generation

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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

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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

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Model (2)

Viewer utility: ui = vi – ni – pi

vi = quality

ni = advertising intensity, = ad disutility

pi = price

Basic channels: v0 0 (symmetric)

Premium channel, held by A Highly attractive: value to viewers = v No substitutes, difficult to replicate

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Contracting

A’s choice Exclusivity Non-exclusivity: contract with B

A makes take-it-or-leave-it offer

Two-part tariff: F + csB

Eqm c = v F > 0 extracts remaining surplus Ad revenue r (per sub.) accrues to A

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Static outcome

Non-exclusivity Gain from excl. G0 < 0 Viewer surplus lower (eqm price = t + v) Welfare higher

Comparative statics dG0/dt < 0 (harder to attract rival subs)

dG0/dv < 0 (greater opp. cost of forgone fees)

dG0/dr < 0 (greater opp. cost of forgone viewers)

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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

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Platform competition

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

b(si) s.t. b' > 0, b'' > 0

Motivation si

t+1 and pit+1 both increasing in si

t

E.g. models of switching costs, network effects, quality investment

(ignore advertising)

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Solving the model

Quadratic form: b(si) = ½si2

Parameter restrictions (concavity of π fn) 0 < < 4t (competitive mkt) t > 3v

Gain from exclusivity

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2 344 34

ttvt

vG

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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

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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

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Interpretation (2)

2. More valuable (“premium”) content

Trade-off between Forgone distn fees: increasing in v Dynamic benefit: asymmetry in si widens in v

As v increases, 1st then 2nd effect dominates

Importance of premium content, especially popular sports

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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

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Discussion

Role of exclusive content v creates initial asymmetry: sA > sB

Prices are decreasing in b′ Convexity: b′(sA) > b′(sB)

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

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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

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Future developments

Digital switchover

Development of IPTV

Internet