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TV wars: content and competition in pay-TV Helen Weeds, University of Essex 5 th Workshop on Media Economics Bologna, 19-20 October 2007
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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
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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)
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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?
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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.
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6 Outline of talk Modelling TV competition Incentives for exclusivity Static model Dynamic platform competition Implications
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7 Industry structure Programme production Channel packaging Transmission (“platforms”) Retailing & revenue generation
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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
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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
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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
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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
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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)
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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22 Future developments Digital switchover Development of IPTV Internet
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