TV wars: content and competition in pay-TV Helen Weeds, University of Essex 5 th Workshop on Media Economics Bologna, October 2007

2 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

3 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)

4 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?

5 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.

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

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

8 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

9 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

10 Model (2)  Viewer utility: u i = v i –  n i – p i v i = quality n i = 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

11 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

12 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)

13 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

14 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)

15 Solving the model  Quadratic form: b(s i ) = ½  s i 2  Parameter restrictions  (concavity of π fn) 0 <  < 4t  (competitive mkt)t > 3v  Gain from exclusivity

16 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

17 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

18 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

19 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

20 Discussion  Role of exclusive content  v creates initial asymmetry: s A > s B  Prices are decreasing in 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

21 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

22 Future developments  Digital switchover  Development of IPTV  Internet