1 Introduction
In November 2004 the broadcasting rights of Dutch premier league football were sold.
This sale always attracts a lot of attention. The recent sale in 2004 was especially interesting, since the sale of these broadcasting rights was executed in a different way than before. The broadcasting rights were divided into six different packages. This was the result of the intervention of the Dutch competition authority NMa, who was concerned with the former selling procedure. In The Netherlands, as in a large part of Europe, bargaining power of football rights holders is strengthened due to the favourable consumer tastes for football. In combination with exclusive contracts and the collective selling of broadcasting rights of football there are great risks of monopoly power issues in this market. After years of arguing and debating, the NMa finally approved the selling procedure that took place in November 2004. However, the NMa continues to keep an eye on the market for broadcasting rights of Dutch premier league and other related markets. The central question I raise in this paper is:
How could the sale of broadcasting rights of Dutch premier league football be best constructed?
In order to answer this question, it is necessary to define the relevant product and geographical market of these broadcasting rights. Therefore, another question raised in this paper is:
What is the relevant market of the Dutch broadcasting rights of premier league football?
Versatel, a former Dutch telecom firm now owned by the Swedish telecom firm Tele2, bought the broadcasting rights of the live football matches of the Dutch premier league in 2004 for a reported € 91.5 million (Telegraaf 2005). Versatel offers not only the live football matches as pay-TV, but also an ADSL broadband Internet connection and fixed telephony, the so-called “triple play” product. The focus in this paper is especially on the upstream level of the television market where broadcasting rights are sold. However, since the arrival of the
“triple play” product, adjoining markets like the markets for telephony and broadband Internet are of importance in this paper and therefore these markets are also discussed. Bundled products, such as the “triple play” product, could have serious effects on related markets.
Hence, the final question raised in this paper is:
How does the bundled “triple play” product affect its related markets?
Before any question could be answered, it is first necessary to understand the Dutch television broadcasting market. This market will be discussed in section 2. In order to find the answer to our central question how to construct the sale of broadcasting rights of Dutch premier league football, possible anti-competitive problems should be examined. In section 3 two main concerns of the sale of broadcasting rights are discussed, i.e. exclusivity and collective selling. The answer to our second question can be found in section 4, where the relevant market of the Dutch broadcasting rights of premier league football will be discussed.
In section 5 a simple Hotelling model is given for the sale of premium broadcasting rights,
such as the broadcasting rights of football. With this model the incentives for both the
upstream seller and the downstream buyer are explored. In section 6 the basics of the
previous and current selling procedure of the broadcasting rights of Dutch premier league
football are laid down and in section 7 alternative selling procedures are considered. In
section 7 the answer to our central question can be found. Adjoining markets of the market
for pay-TV broadcasting are also discussed, since several products are bundled these days
with pay-TV. The most important of these products are discussed in section 8. Possible anti-
competitive and/or pro-competitive effects of bundling will be discussed in section 9. In this
section the final question will be answered. The conclusion of this paper can be found in
section 10.
2 Television broadcasting in The Netherlands
The market for television broadcasts can be divided into two segments, free-TV (public funded TV and commercial-TV) and pay-TV. In subsection 2.1 the role of TV
broadcasters in the Dutch market for television will be discussed. The focus in subsection 2.1 will be on free-TV. In subsection 2.2 distributors of television packages are discussed. In subsection 2.3 special attention is paid to pay-TV.
2.1 TV broadcasters
There are three large TV broadcasters active on the Dutch market of TV content.
According to the Commissariaat van de Media (2002), the national public funded TV
broadcaster NOS has a market share of 38.5% in 2001. The NOS owns three TV channels, Nederland1, Nederland2, and Nederland3. Besides the NOS, there are two large commercial TV broadcasters active in The Netherlands. RTL/Holland Mediagroep SA, which owns the TV channels RTL4, RTL5, and RTL7, has a market share of 27.3%. SBS Broadcasting SA, which owns the TV channels SBS6, Net5, and Yorin, has a market share of 18.6%. The other broadcasters in The Netherlands are small and together they amount for 12.6% of the
market.
TV broadcasters determine the content (i.e. programming) of the TV channels. In order to get a satisfying content, TV broadcasters make or buy programmes. Programmes can be bought from another broadcaster or a TV producer can be hired to make a
programme. According to the Commissariaat van de Media (2002), the TV broadcasters are highly dependent on TV producers and rights owners of film, sport and drama content. The circumstances in the upstream market of content, where rights owners sell their broadcasting rights, have been completely turned. In the past, there were only a few terrestrial
broadcasters and quite some sellers of content. Thus, TV broadcasters had most of the
bargaining power. Nowadays, due to increased capacity of TV broadcasting (due to the
introduction of pay-TV and new technologies such as cable, satellite, and digital television)
and an increase in market players (due to market liberalisation), demand for content is high
and bargaining power has moved from TV broadcasters to the sellers of content. This is
especially the case for premium content, such as the broadcasting rights of live football
coverage. This opinion is shared with Harbord & Hernando & Von Graevenitz (1999), who
stated: “The evidence we have collected convinces us that each of the major sports events
earns significant ‘rents’ or supranormal profits. Equivalently, ownership of the rights to these
events confers significant market power upon broadcasters”. And it also seems that
upstream rights owners continue to earn significant profits, according to Harbord & Hernando
& Von Graevenitz (1999). They argue that significant (monopoly) profits will be made in the future too, since viewing figures will remain very high and viewer demand is highly inelastic, especially for sport content. Many viewers of sports are particularly interested in and loyal to one team. Hence, they will favour sport programmes related to their team above any other kind of programme. This means that there is no close substitute for premium sport content, which gives the upstream rights owner the power to sell their broadcasting rights with significant monopoly profit.
In order to supply content to consumers, TV broadcasters are dependent on distributors, such as cable and satellite companies. The distribution of TV channels is described in the next section. It is important to note here that distributors are also active as suppliers of content. Since the Mediawet went active in 1997, cable companies are allowed to offer these services directly to consumers. Before 1997, the cable companies were only allowed to transmit the technical signals of television and radio to consumers.
Now that it is known how the market of TV broadcaster works, we describe the structure of the market for broadcasting rights of premier league football. In figure 1 on the next page this market structure is shown.
At the upstream level the broadcasting rights of premier league football are sold by the rights owners to a TV broadcaster. Up to now, these broadcasting rights are sold with exclusive contracts. After the broadcasting rights have been acquired, footage of these football matches has to be shot. A TV producer is often hired for this job. The footage of the football matches is used to make a complete programme ready to broadcast. The footage can also be resold at the wholesale market to other TV broadcasters. TV broadcasters collect and make content sufficient to fill their TV channels. Remember that TV broadcasters need to use a platform distributor’s capacity in order to broadcast their TV channels. Platform distributors charge access tariffs to the TV broadcasters. Platform distributors, as well as TV producers are excluded from figure 1 for simplicity. If a TV broadcaster comes to an
agreement with a platform distributor, it competes with other TV broadcasters for
advertisement deals at the downstream level. TV broadcasters also compete for viewers at
the downstream level. Pay-TV broadcasters compete with each other by selling subscriptions
of their pay-TV channels to consumers. The actual subscriptions for consumers can be
acquired from the platform distributor. As mentioned before, platform distributors are allowed
nowadays to act as TV broadcasters and sell their own services. Hence, a TV broadcaster in
this figure could also be a platform distributor.
Figure 1: Structure of the market for broadcasting rights of football
Rights owners
TV broadcaster
Consumers
Other TV broadcasters
Wholesale level Upstream
level
bs Su
tio ip cr
ns
Content
B ro ad ca st in g rig ht s
Su bs cr ip tio ns Downstream
level Content
2.2 Distributors
Approximately 97.6% of the Dutch households owns at least one television. In The
Netherlands, most televisions are connected to cable (90.4%), as shown in table 1 on the
next page. This means that there are cable networks through almost the entire country. The
major advantages of cable connections are their stable reception and their high potential for
interactivity, according to Adda & Ottaviani (2005).
Only 6.6% of the Dutch households have a satellite connection. A drawback of satellite connections is its limited potential for interactivity services, according to Adda &
Ottaviani (2005). This is a serious drawback, since these services are likely to grow in the future.
A connection through ether (terrestrial connection) is the oldest technology. It used to be the primary means of distribution for television. In The Netherlands this technology has almost completely disappeared due to its lack of capacity. Right now, television through ether has a market share of 1.8%. However, due to the transition to digital television, the terrestrial technology allows for more capacity. This resulted in the arrival of Digitenne, a service that provides a digital connection through ether. According to Adda & Ottaviani (2005), important disadvantages of ether connections are their low potential for interactivity and their low capacity. Although the digitalisation improved the limited capacity, the ether distributors still offer fewer television channels than the cable and satellite distributors. The reception with an ether connection can also be unstable under certain circumstances. On the other hand, a connection through ether is wireless and therefore mobile. It enables subscribers to watch television outdoors. An ether connection can easily be transported and used on holidays and in cars.
Television through a connection with broadband Internet is only recently available and only acquired a market share of 0.1%. High speed broadband Internet is available through a cable connection or through the telecommunication infrastructure ADSL.
Broadband Internet has a lot of potential on this market. According to the EIM (2004), broadband Internet is highly suitable for bundling, an important issue that will be discussed later on in this paper.
Table 1: Market shares of means of distribution of television channels
Market share (%) 95% confidence level (%)
Cable 90.4 88.2-92.6
Satellite 6.6 4.8-8.5
Ether 1.8 0.8-2.8
Digitenne (service through ether network with digital reception)
1.0 0.2-1.7
Broadband Internet 0.1 0.0-0.4
Other 0.1 0.0-0.4
Total 100.0
Source: EIM (2004)
Cable is by far the largest means of distribution of TV channels. The market shares of
cable distributors in The Netherlands are given on the next page in table 2. As you can see in
table 2, there are three major players on this market. UPC has a market share of 27.8%, Casema has a market share of 24.4%, and Essent has a market share of 23.3%. It is important to note here that all of these cable distributors have a local monopoly. Consumers cannot switch between different cable distributors at one place. However, this might change in the future. According to the NMa (2005), the Dutch telecommunication supervisor OPTA intends to force cable companies to open up their networks to other providers.
Table 2: Market shares of cable distributors
Market share (%) 95% confidence level (%)
UPC 27.8 24.4-31.1
Casema 24.4 21.2-27.6
Essent 23.3 20.1-26.4
Multikabel 6.0 4.2-7.8
CAI Westland 2.8 1.6-4.0
Delta 1.6 0.6-2.5
Other 5.9 4.1-7.7
Distributor unknown 8.3 6.2-10.3
Total 100.0
Source: EIM (2004)
2.2.1 Cable distributors’ services
Cable distributors offer two services. First, a cable distributor offers capacity for TV broadcasters if they desire access to viewers. TV broadcasters often pay a fee for this
access, a so-called access tariff. Second, a cable distributor offers collections of TV channels in several packages to the viewers. These television packages will be discussed later on in this subsection.
Firstly, cable companies like UPC, Casema and Essent charge TV broadcasters an access tariff to get their channels on the air. Cable companies argued that if more channels are added on the cable, the capacity and supply of cable should be expanded. Cable companies charged the commercial TV broadcasters a tariff as compensation for this expansion of cable capacity. Nowadays, these access tariffs often are points of controversy.
Instead of paying an access tariff, TV broadcasters desire the cable companies to pay them for supplying TV channels. The Dutch Competition Authority NMa made guidelines for the access tariffs of distribution networks on 17 August 1999. The NMa decided that suppliers of distribution networks, such as the cable companies, should charge transparent and non- discriminatory access tariffs that are cost-based.
Secondly, cable distributors offer several packages of TV channels to viewers. In
table 3 on the next page the main packages and prices of the Dutch distributors of television
connections are shown. The content and prices of these packages change frequently. Data for table 3 is collected on 10 October 2005 and may not be accurate for later dates.
Table 3: Primary Dutch television packages Technique Distributor Package # of TV
channels # of radio
channels Price (€ per month) Cable Essent
(analogue) Basispakket 30 30 14.95
Cable Essent (digital) TV Home Basis 45 30 14.95
Cable Essent (digital) TV Home Extra 90 + 30 Music Choice
1channels
30 An additional
7.95 Cable Casema
(analogue) Budget RTV 17 32 5.99-8.70
2Cable Casema
(analogue) Standaard RTV 34 32 9.72-14.95
Cable Casema
(digital) Standaard digital 34 32 9.72-14.95
Cable Casema
(digital) Digital pluspakket 50 + 40 Music
Choice channels
32 An additional
7.50
Cable UPC
(analogue) Standaardpakket
Radio/TV 30 39 15.53
Cable UPC (digital) Digital TV pack 42 39 15.53
Cable UPC (digital) Digital TV Extra
channel pack 73 39 An additional
4.46 Satellite CanalDigitaal Set-Top-Box-
pakket 89 119 2.50
Satellite CanalDigitaal Basis-pakket 99 119 7.45
Satellite CanalDigitaal Familie-pakket 103 119 12.95
Ether Digitenne At Home TV 27 17 8.95
3Ether KPN TV van KPN 23 20 13.95
4Source: Websites of distributors and www.digitelevisie.nl
Every major cable distributor offers a basic package with about 32 TV channels and 30 radio channels. On the cable, only Casema offers a package smaller and cheaper than the basic package. This package is called Budget RTV and consists of 17 TV channels and 32 radio channels. The digital versions of the basic packages are available for the same price per month, as shown in table 3. However, a digital receiver/decoder is needed as well as a smart card in order to watch television digitally. These are usually available in a starters package. Prices of these starters packages vary over time and are sometimes for free.
These starters packages of the different distributors are often subdue to fierce price competition.
1
Music Choice offers non-stop music channels.
2
Price is dependent of living area.
3
€ 3.00 per additional TV.
4
€ 7.95 if you already have a fixed telephony subscription of KPN.
The only satellite distributor in The Netherlands is CanalDigitaal. CanalDigitaal offers a basic “Set-Top-Box-pakket” for € 2.50, which includes the Dutch public funded TV channels and nearly all Dutch commercial TV channels as well as many international free-TV
channels. This package includes so many channels due to all of these international free-TV channels. However, most of these channels are unknown and therefore considered less valuable to Dutch consumers. For € 7.45 an additional 10 commercial channels are included, such as Talpa, MTV, Nickelodeon, Discovery Channel, and National Geographic Channel.
This package is called the “Basis-pakket”. The “Familie-pakket” includes 4 more channels for the entire family for € 12.95. These channels are Motors TV, Cartoon Network, Hallmark Channel, and Turner Classic Movies (TCM). When we compare basic packages on cable and satellite, we see that the satellite package “Basis-pakket” costs half the price of the cable packages by Essent, UPC, and Casema. However, satellite has a limited potential for
interactivity services in the future, as mentioned before. Satellite equipment that is needed to watch TV, such as a dish, is also expensive.
In addition to the packages mentioned above, it is also possible to get other (international) packages. These packages mostly consist of foreign channels. These
channels, such as the Turkish Pluspakket or Set Asia, usually do not have Dutch subtitles or translation. We will not include these packages in our analysis, since they are of little interest for this paper.
There are two main distributors of a digital ether connection for the television, KPN and Digitenne. Digitenne offers four channels more than KPN, but its price is a bit higher (respectively € 8.95 and € 7.95). However, the price for “TV van KPN” is increased with € 6 if the consumer does not already have a fixed telephony connection with KPN.
We have seen that consumers can choose between different distributors and several techniques of transmission in order to receive a television connection. However, it is
important to note here that distributors have limited range. The choice of distributor depends on the location of the consumer. Cable companies, for instance, still have local monopolies.
This means that only one cable company is active on any location. Hence, the choice of distributor and of transmission technique is limited. Another example is Versatel, that can only offer its broadband Internet connection to about 40% of the Dutch population.
Besides the packages described so far, a consumer can also opt for pay-TV.
2.3 Pay-TV in The Netherlands
What exactly is pay-TV? Pay-TV refers to subscription-based broadcasts that are
encrypted. In order to view these pay-TV channels a decryption device is needed, a so-called
decoder or set-top-box. This is also needed to receive digital TV broadcasts, because the vast majority of TV sets do not have such a tuner. In addition, a smart card of your distributor is needed. This smart card contains information about which channels a subscriber has access to. There are two primary forms of pay-TV. There exist pay-per-channel TV, where you pay your distributor in order to gain access to a pay-TV channel. There also exists pay- per-view TV (PPV), where a fee is paid to the distributor for a single programme or a time- limited viewing. These programmes are aired at fixed times for everyone who ordered it. This is not the same as video-on-demand, which allows a viewer to see a programme at any time.
Video-on-demand is not considered to be pay-TV.
By the terminology of law, pay-television or pay-TV is a special kind of television broadcasting. It is also of special importance in this paper, since live football coverage of the Dutch premier league is broadcasted on pay-TV as of 1997. From 1997 until 2004, the pay- TV channel Canal+ broadcasted the live football matches of the Dutch premier league. As of the season 2004/05, the pay-TV channel Versatel broadcasts those live football matches.
Versatel owns the rights to broadcast the live football matches for three seasons. It
broadcasts the matches through an ADSL connection. Since 2005, a television connection is also available in The Netherlands through an Internet connection. A fast broadband Internet connection is needed for this. In 2006, Tiscali will also offer television through the Internet.
This technique is scarcely used today. However, it is likely that the number of ADSL connections and thus digital television supply through these ADSL connections will grow in the future.
In The Netherlands, the market for pay-TV is still quite small. The newspaper Het Financiële Dagblad states that about 42,000 subscribers were connected to Versatel by the end of September 2005. Canal+ still had about 235,000 subscribers, as argued by the newspaper Algemeen Dagblad. There are not many pay-TV broadcasters. Besides the primary independent pay-TV broadcasters mentioned below, cable companies sometimes have their own pay-TV channels. An example of this is Arrivo of UPC.
Versatel: offers one channel with live football matches of the Dutch premier league.
Additional to these live football matches, subscribers can also view TV channels of the English football clubs Arsenal, Chelsea, Manchester United and Liverpool. According to Versatel, it will also be possible to view other TV programmes, documentaries and movies on demand in the future through its ADSL Internet network. In order to acquire Versatel’s pay- TV channel, a consumer can choose between three different bundled products
5. Compleet Family consists of a 4 Mb/s ADSL Internet connection plus a fixed telephony subscription and a selection of live football matches on the pay-TV channel and costs € 39.95 per month.
5
Data of Versatel’s packages and prices are collected on 11 January 2006.
Voetbal costs € 39.95 per month and consists of a 20 Mb/s ADSL Internet connection and the complete pay-TV channel. Finally, Compleet Voetbal consists of a 20 Mb/s ADSL Internet connection plus a fixed telephony subscription and the complete pay-TV channel and costs € 49.95 per month. Because Versatel is not able to reach all Dutch inhabitants, Versatel’s pay- TV channel is also available through satellite by CanalDigitaal and it costs € 19.95 per month.
Sport1 & Film1 (formerly known as Canal+/Het Sportkanaal): as of February 1
stof 2006, Chellomedia offers 4 movies channels by the name Film1 and one sports channel with seven additional windows by the name Sport1. A consumer can subscribe to Sport1 and Film1 separately or jointly. Sport1 offers live football matches of the English, German, Spanish, Italian, Brazilian, Scottish and Portuguese premier leagues, the World
Championship 2006 and the UEFA Champions League 24 hours a day. Live matches of other sports, such as hockey, tennis and basketball and the Olympic Winter games 2006 are also broadcasted. The subscription price to Sport1 and Film1 are not revealed yet, however Canal+ and Het Sportkanaal together costs about € 23 per month. Canal+, by the name CanalDigitaal, is also distributor of digital television services through satellite connections.
Canal+ offers a standard package similar to cable distributors. Logically, Canal+ is also available with a satellite connection of CanalDigitaal. It costs € 19.95 per month.
Garuda TV: launched in December 2005. This channel is developed for people who feel “connected to the Indonesian Archipelago” and it will offer programmes 24 hours a day about tourism, cooking, music, fashion, sports, as well as movies and documentaries.
However, for this paper Garuda TV is not interesting, since it doesn’t offer live matches like
Versatel and Sport1 do.
3 Competition issues concerning the sale of broadcasting rights of football
The two main competition issues around the sale of Dutch broadcasting rights of premier league football are the collective selling and the exclusive contracts of these rights by the Dutch premier league football clubs. Exclusivity will be discussed in subsection 3.1 and collective selling will be discussed in subsection 3.2.
Before these anti-competitive issues are discussed in detail, first we take a look at what European law states about these issues. Article 81 of the EC Treaty
6deals with horizontal and vertical agreements. Exclusivity is a form of a vertical agreement and collective selling is a form of a horizontal agreement.
Article 81 of the EC Treaty:
1. The following shall be prohibited as incompatible with the common market: all
agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
- any agreement or category of agreements between undertakings;
- any decision or category of decisions by associations of undertakings;
- any concerted practice or category of concerted practices,
6
http://europa.eu.int/comm/competition/legislation/treaties/ec/art81_en.html
which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
In short, Article 81,1 of the EC Treaty states that anti-competitive agreements are prohibited. These agreements shall be automatically void, as stated in Article 81,2, except for those agreements that contribute to improving the production or distribution of goods or to promoting technical or economic progress (Article 81,3).
The implementation of Article 81 of the EC Treaty has undergone important
modifications since 1 May 2004. One of these modifications is “that national authorities and judges could also give exemptions”, according to Motta (2004). Article 84 of the EC Treaty also states that national authorities shall rule on the admissibility of agreements.
Article 84 of the EC Treaty:
Until the entry into force of the provisions adopted in pursuance of Article 83, the authorities in Member States shall rule on the admissibility of agreements, decisions and concerted practices and on abuse of a dominant position in the common market in accordance with the law of their country and with the provisions of Article 81, in particular paragraph 3, and of Article 82.
As mentioned above, national authorities examine possible anti-competitive
agreements. It is important to note that solutions to one case could not always be used in
other cases. There are differences in the ownership of broadcasting rights of football
between countries. For example, in The Netherlands the broadcasting rights of football
matches of the Dutch premier league belong to the home club. In contrast with The
Netherlands, the broadcasting rights of football matches of the English Premier League
belong to the Football Association. Consequently, national competition authorities should
examine possible anti-competitive agreements on a case-by-case basis. This argument is
strengthened for the pay-TV market, because of the uncertainties regarding the effects of
agreements in other markets due to the current rapid innovation.
3.1 Exclusivity
Broadcasting rights of football are commonly sold on a basis of exclusivity. The reason why upstream rights holders implement exclusivity is that broadcasting rights are highly valuable only for a first time viewing and a short period of time. Viewers are mainly interested in the live broadcasting of a football match. After the first live broadcasting of football matches or other sport events, the value of these rights decreases dramatically.
Viewers are not interested in viewing a football match a week after it has been played. For a TV broadcaster, the broadcasting rights of football are therefore only interesting and valuable if other TV broadcasters cannot acquire the same rights, so that it is the only one
broadcasting these football matches. These rights are even more valuable, since it is commonly known and also argued by the NMa (2004) that live football matches would get a pay-TV broadcaster many new subscribers and a free-TV broadcaster big advertisement deals. Football coverage also creates a good image for a TV channel, according to the NMa (2004). Hence, an upstream rights holder can ask a higher price for its rights if it sells exclusively. Indeed, in subsection 5.3.4 it will be shown that, by selling the broadcasting rights of football exclusively, the upstream rights holder maximizes the monopoly rent it can extract from TV broadcasters.
In the next subsection potential anti-competitive concerns of exclusive contracts in the broadcasting market will be discussed.
3.1.1 Competition issues
One anti-competitive concern about the current selling procedure of the broadcasting rights of football is the inelasticity of football content supply. Exclusivity is the reason why supply inelasticity exists, since other broadcasters are banned from supplying additional football content if demand increases. The broadcaster that owns the exclusive broadcasting rights has monopoly power. This means that this broadcaster could limit supply and increase prices quite easily. In The Netherlands, the NMa (2002) concluded that only 44 out of 306 matches were broadcasted live.
Demand for football and other sports content is inelastic as well. This thought is strengthened by the paper of Harbord & Hernando & Von Graevenitz (1999), where the data tells us that “sports viewing behaviour does not appear to be influenced by the coincidence of other major sports events being broadcast simultaneously, or nearly simultaneous”. But since demand inelasticity lies in the character of sport fans, it cannot readily be changed.
Therefore, let us now further discuss the inelasticity of supply. One way to make
supply more elastic is to shorten the duration and range of exclusive contracts. For
competition authorities it is important to keep in mind that exclusive contracts may distort the market through foreclosure, according to Tonazzi (2003). That is, a broadcaster gains a dominant position when vertical exclusive agreements have a long duration and a wide range of broadcasting rights. This dominant position makes it difficult for firms to enter the market.
Hence, national authorities should pay attention that dominant broadcasters do not create market foreclosure through such agreements. However, it could also be argued that an exclusive agreement with a long duration also ensures a reasonable return on investment for a broadcaster. Especially in the current broadcasting market, which is rapidly developing and changing, this might be a sensible argument. These current changes, mainly triggered by the digitalization of television and other new technologies, create uncertainty and thus risk.
Another problem of exclusivity is that the firm that acquired the broadcasting rights of football can abuse its dominant position at the wholesale level, as shown in subsection 5.2.2 and argued in subsection 5.4. According to Harbord & Szymanksi (2003), reselling the broadcasting rights of football for per subscriber fees will simply increase the competitors’
marginal cost (raising rival’s cost), while this will increase the opportunity cost of serving its own customers at the same time.
So far it has been argued that a broadcaster that acquired the exclusive broadcasting rights of football gains a dominant position in the broadcasting market, especially if the exclusive contract contains a long duration and a wide range. However, exclusive contracts might also harm adjoining markets. For example, a firm that acquired the exclusive
broadcasting rights of live football coverage of the Dutch premier league could leverage this monopoly power to other markets through bundling the live football broadcasts with other products. Versatel in The Netherlands does this. Versatel owns the broadcasting rights of live football matches of the Dutch premier league. The only way to view these matches for
consumers is to subscribe to Versatel’s ADSL Internet connection. A consumer will also get a fixed telephony subscription with Versatel. A more detailed discussion about Versatel,
bundling and its possible efficiencies and/or anti-competitive issues can be found in section 9.
Finally, it is sensible to mention vertical mergers here, since a vertical merger between a football club and a broadcaster or distributor might create the same effects as exclusive contracts. After all, the Dutch premier league football clubs are the owners of the broadcasting rights and a broadcaster is willing to buy these rights. This vertical integration might endanger competition at the bidding stage. Just recently, the NMa approved the merger between UPC (cable distributor) and Canal+ (pay-TV broadcaster). This is
considered to be not much of a problem, since cable distributors are already allowed to offer
services other than their cable connections directly to consumers. The NMa (2005) also
argued that many new players arrived on the pay-TV market and that sellers of premium film content have great bargaining power over the buyers. Other firms have also made great investments in different distribution platforms, such as ADSL, satellite and ether. Hence, market power after this merger is limited for UPC. Furthermore, the NMa (2005) concluded that the content of Canal+ is not of crucial importance for other distributors to be able to offer interesting packages of TV channels. Finally, the Dutch telecommunication supervisor OPTA intends to force cable distributors to open up their networks to other providers. This would decrease cable distributors’ market power even more. However, national competition
authorities should always closely look at vertical mergers, since they could disturb the market significantly.
3.2 Collective selling
As mentioned in this section, article 81 of the EC Treaty states among other things that agreements between firms are prohibited if those agreements directly or indirectly fix any trading conditions or limit or control production. It will be discussed in subsection 3.2.1 that horizontal agreements at the upstream level of the broadcasting market could limit the supply of football broadcasts on television. In subsection 3.2.2 competition issues at the
downstream level will be discussed, where the effect on competition of horizontal agreements is dependent on which firms make these agreements.
3.2.1 Upstream level
In the case of the Dutch broadcasting rights of premier league football, the rights owners (home clubs) could, jointly as a league, form a cartel at the upstream level and sell their broadcasting rights collectively. The clubs could jointly determine the price and other important conditions. Especially in combination with exclusive contracts, this means that the clubs together could limit their supply quite easily. In The Netherlands, this led to only one supplier of rights offering only two packages and (intentionally) to a limited supply of
broadcasting rights of the Dutch football premier league. This limited supply might result in a price increase and a limitation in the freedom of consumers’ choice, according to the
European Commission (2002). For a league to be considered as a cartel, it is crucial that clubs can be seen as firms. Selling broadcasting rights is a normal economic activity. The European Commission said in 2005: “ The Court of Justice ruled in 1974 that, as an economic activity, sport was subject to Community legislation
7. Indeed, the importance of sport in Europe means that its commercial activities can have significant effects on a number
7
Case 36/74, Walrave v Union Cycliste Internationale, [1974] ECR 1405.
of markets. Competition law is applicable to the economic activities connected with sport events, but not pure sporting rules”. Hence, clubs can be seen as normal firms in this case and competition law should be applied. More importantly, we should bear in mind that a league cannot be considered as a cartel if national law states that broadcasting rights belong to a league or a federation, instead of to the clubs. In that case, a league or federation would be considered as one firm. Therefore, it would sell just one product instead of a bundle of products. In England, for instance, the Restrictive Practice Court ruled in 1996 that the product sold by the Premier League was the League championship as a whole and not just the individual matches. In contrast with The Netherlands, where a judge ruled in 1997 that the broadcasting rights belong to the home clubs, in England the broadcasting rights belong to the Premier League. According to Tonazzi (2003), the Italian Competition Authority
“considered that the ownership of the economic rights (and therefore the broadcasting rights) to sport events should be assigned to the home club, who bears the business risk connected with the organization of the event”. So, it is national civil law that decides whom the
broadcasting rights belong to. This is an important issue to determine the outcome in anti- competitive issues.
Thus, it seems that if the premier league of football in The Netherlands chooses to sell its rights collectively, it forms a cartel. Does this automatically mean collective selling is prohibited? The answer is not that easily found. That is, Article 81 of the EC Treaty makes an exception for those agreements between firms that contributes to “improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit”. Furthermore, the agreements should not
“impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives” or “afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question”.
It has been argued by Findlay & Holahan & Oughton (1999) that the football industry is not like other industries. Football clubs need each other to sustain an attractive
competition. Spectators of a football league are interested in the competitive balance within the league. Although clubs are competitors, they will never try to eliminate each other completely out of the market. In the long run, every club profits from a strong competition.
Findlay & Holahan & Oughton (1999) also argued in their paper that a collective selling of the broadcasting rights of football is the only or more efficient way of assuring competitive
balance. However, the NMa (2004) has argued that clubs could sell their rights individually,
without harming the competitive balance of the league. One justification for limited supply of
matches often argued by the clubs, and indeed argued by the ENV (who sold the rights on
behalf of the premier league clubs, see also p. 39) in the recent case of the NMa (2004), is
that spectators will not visit live matches as much if more live matches are broadcasted on television. However, this reasoning is not very credible, since most football clubs in The Netherlands face a huge excess demand for tickets and have expanded their stadiums in the recent past or are about to expand in the near future.
The national competition authorities take a different point of view however when the sale of the broadcasting rights to highlights of the football matches is considered. The
collective sale of these rights is usually approved by every national competition authority, like the Italian Competition Authority (Tonazzi, 2003) and the Dutch Competition Authority NMa (2004) did. It is usually argued that highlights of each football match separately cannot be reasonably broadcasted. The highlights should be broadcasted altogether for the purpose of a good overview of the competition.
3.2.2 Downstream level
At the downstream level, where broadcasters compete for viewers, subscribers, and/or advertisement deals, broadcasters can also make horizontal agreements. However, the anti-competitive effects of these agreements on the downstream market depend on the market power of the parties, according to Tonazzi (2003). When strong broadcasters with considerable market power make these horizontal agreements, competition between broadcasters is likely to be restricted. It would be very difficult for firms to enter this market and acquire broadcasting rights when these strong broadcasters have gained so much market power. However, smaller and weaker broadcasters with low market power that could not buy broadcasting rights individually, could also join forces and buy certain broadcasting rights collectively. These horizontal agreements probably would have a pro-competitive effect, since these weaker broadcasters together form a competitive power bloc against the stronger broadcasters. This is the same kind of reasoning used by the European
Commission (2002) about rights splitting, which will also be discussed in section 7. If there is only one bundle of rights, according to the European Commission, only the “bigger media groups are able to afford the acquisition and exploitation of the bundle of rights”. Hence, splitting the rights into multiple packages or the joint forces of smaller broadcasters has a pro-competitive effect. It would be likely that supply and prices cannot be controlled and limited that easily anymore.
Therefore, horizontal agreements should only be allowed if they are beneficial to the
consumer and if they are in compliance with Article 81 of the EC Treaty. This means that
national authorities and judges could and should give exemptions for those agreements that
contribute to improving the production or distribution of goods or to promoting technical or
economic progress.
4 Relevant market
In The Netherlands, the Dutch Competition Authority NMa controls for anti-
competitive behaviour of firms. The first step in controlling for anti-competitive behaviour is to determine whether a firm has obtained or could obtain strong market power on a particular market. Note that a monopoly position itself is not prohibited. Only the (illegal) abuse of a monopoly position can be marked as anti-competitive behaviour. In order to measure market power, the NMa first defines the relevant market
8. A correct definition of the relevant market is highly important in determining various competition issues, according to the NMa.
The relevant market consists of a “set of products and geographical areas that exercise some competitive constraint on each other”, according to Motta (2004). Harbord &
Hernando & Von Graevenitz (1999) describe a competitive constraint as an “ability to restrain the actions of the undertakings vis-à-vis their customers (i.e. price setting, quantity and quality of product supplied) through competition for these customers”. The relevant market is determined by the constraints imposed by substitute products or services and by the
geographical area in which a firm competes with other firms. Hence, we are looking for a relevant product market as well as a relevant geographical market. In this section the relevant product and geographical market will be determined for the broadcasting rights of Dutch premier league football (Eredivisie). The relevant product market is discussed in subsection 4.2 and in subsection 4.3 the relevant geographical market is discussed. The SSNIP test, a formal test to determine a relevant market, will be discussed in the following section. The NMa also uses this SSNIP test.
4.1 SSNIP test
A relevant market can be formally defined by using the SSNIP (Small but Significant Non-transitory Increase in Prices) test. Motta (2004) describes the SSNIP test as a test that asks whether a hypothetical monopolist could profitably increase its price by 5-10% in a non- transitory way, given the availability of potential substitute products. If the answer is yes, then there exist no other products that compete with the product of this firm in question. Hence, this product constitutes a relevant market. If the answer is no, there exists at least one substitute product, and the market definition should be widened for this test. This process should be repeated until the answer of the SSNIP test is yes.
Whether a pay-TV broadcaster could profitably increase its prices of subscriptions remains a question in The Netherlands, since the pay-TV broadcaster Versatel acquired the
8
nmanet.nl/nederlands/home/Over_de_NMA/Taken_werkveld_werkwijze/Werkveld/De_relevante_markt.asp
broadcasting rights of live football coverage for the very first time in December 2004. Due to a lack of data, a formal SSNIP test cannot be executed properly. Therefore, the relevant product and geographical markets will be determined in a more loose way. Potential
substitute products are considered in this analysis, just like in the SSNIP test. Substitutability is an important factor in the SSNIP test and this will also be examined for the market of broadcasting rights of football in The Netherlands.
4.2 Relevant product market
According to the NMa, a relevant product market contains all the products that are considered to be exchangeable or substitutable by the buyers on grounds of the
characteristics of the product, its price and its intended use. This is called substitutability on the demand side. When buyers consider products substitutable, these products exercise a competitive constraint upon each other on the relevant market. However, according to Motta (2004), the substitutability on the supply side is also important, because this could tell us whether producers outside the relevant market could switch production in a short time and start supplying a substitutable product if a price rise occurs. So, when the prices rise, firms that are currently selling other products could also exercise a competitive constraint on this market. Hence, both demand and supply substitutability should be considered to determine a relevant market properly.
In the following subsections the relevant product market for the Dutch broadcasting rights of premier league football (Eredivisie) is determined, i.e. we investigate which products exercise a competitive constraint on these broadcasting rights. In subsection 4.2.1 the
relevant product market at the downstream level will be discussed. The relevant product market at the wholesale level will be discussed in subsection 4.2.2, and finally the relevant product market at the upstream level will be discussed in subsection 4.2.3.
4.2.1 Downstream level, retail market
As mentioned before, the television market can be divided into two segments at the downstream retail level, free-TV (public funded TV and commercial-TV) and pay-TV. Of course, to a certain extent there is competition for audience share between all television broadcasters of the different segments. In practice, however, public funded TV rarely competes with pay-TV, since public funded TV is bound by obligations and licenses to
broadcast a diverse and multiform content. Hence, a public funded TV broadcaster cannot air football matches or other premium content 24 hours a day like pay-TV broadcasters can.
Furthermore, public funded TV cannot charge its viewers a subscription fee for its channels
and earn back a large investment, such as premium content. Moreover, viewers will only purchase pay-TV next to free-TV if the content on pay-TV is different from free-TV. Due to different contents, pay-TV and public funded TV are different products and therefore they are no close substitutes. This also means that there is no real competition between both
segments and they are separate markets.
Effective competition neither exists between commercial-TV and pay-TV. For commercial-TV, advertising is the essential means of revenue. The higher the share of audience, the higher the revenues from advertising. So, the main objective of commercial-TV broadcasters is to appeal to the masses and to advertisers’ target consumer groups.
Advertising, however, is less crucial for pay-TV broadcasters. They earn revenue by selling subscriptions and thus are interested in making programmes in a way that meets the interests of their subscribers. Furthermore, pay-TV usually has specific content. Hence, it attracts a specific audience and thus is only attractive to specialist advertisers. Commercial- TV and pay-TV broadcasters often do not compete for the same advertisement deals or viewers. Advertisers that do not wish to appeal to specific viewers on pay-TV will rather advertise on commercial-TV to reach their target consumer group. All of this leads to the conclusion that commercial-TV market is also separated from the pay-TV market.
As mentioned before, in this paper we are mainly concerned with the sale of broadcasting rights of live football coverage of the Dutch premier league. Therefore, the focus in this paper will be on the pay-TV market and not on the free-TV market, since free-TV is not an effective competitor on this market.
4.2.2 Wholesale market
Broadcasters compete by means of content. Content is a distinguishing feature of the audiovisual sector and should be dealt with when discussing anti-competitive issues. At the wholesale level, TV broadcasters compete for content that is resold on this market. As
discussed in the previous subsection, there exists little effective competition between free-TV
and pay-TV at the downstream retail level. Pay-TV is considered to be a supplementary
service. Pay-TV is distinguished from free-TV due to the added value element, which it can
also successfully extract from the viewers through subscriptions. The extraction of added
value is also the reason why pay-TV broadcasters are more successful bidders on the
upstream market for premium content compared to free-TV broadcasters. Pay-TV in the
Netherlands, as well as in other European countries, is highly dependent on the ability to
offer exclusive first television viewing of premium film and sports content, as argued by the
Monopolies and Mergers Commission (1999) and Harbord & Szymanski (2003). Pay-TV
broadcasters need this premium content in order to attract subscribers, due to the already
attractive supply of free-TV. Premium film and sport content together has long been considered to be a relevant separate market by the European Commission, according to Vollerbregt (1998). The reason for this was that the viewing figures for this type of content are much higher than for other types of content. This is correct, but, in contrast to premium film content, premium sport content almost entirely loses its value after viewing the live event. Also, demand and supply curves are far steeper for sports than for films. Supply curves are steep, because of the impossibility for another broadcaster to respond to additional demand, due to exclusive contracts that are secured far in advance. Demand curves are steep and thus inelastic, mainly because of dedicated fans, who will always be loyal to their clubs. Hence, premium sport content is different from premium film content. The Italian Competition Authority also examined the substitutability between premium sports and premium film content and concluded that the products are complementary, according to Tonazzi (2003). This means that premium film content is considered to be not relevant in the market for broadcasting rights of Italian premier league football. This reasoning is followed in this paper for the sale of broadcasting rights of Dutch premier league football. Hence, the relevant product market at the wholesale level is the market for premium sports programmes.
Premium sports pay-TV broadcasters compete with each other for these programmes in order to collect an attractive content for their pay-TV channels.
4.2.3 Upstream level
At the upstream level, the broadcasting rights of Dutch premier league football are
sold to the downstream TV broadcasters. Tonazzi (2003) said that “the assessment of the
relevant market must be done with regard to the substitutability that broadcasting of sport
events has for the consumers”. This substitutability is also called demand substitutability. In
The Netherlands it is clear that live football coverage has no close substitute and attracts by
far the most viewers. Demand substitutability lies in the character of sport fans and cannot
readily be changed. Of course, demand substitutability of different sports is an individual
issue, largely depending on whether you are an occasional or a fanatic sports viewer. There
are separate markets for broadcasting rights of individual sports at the upstream level, as
also argued by the European commission (1998). It is also quite reasonable to consider golf
not to be a substitute for football, for instance. A football fan is not automatically a golf fan,
just because football and golf are both sports. These days it is a common belief among many
economists to regard football as a separate relevant market. One of them is Tonazzi (2003),
who said: “It is now generally accepted that, considering the evolution of the markets, it is no
longer possible to define a relevant market for sport broadcasting rights in general, but for
some specific sports like football, or Formula 1 motor”. The European Commission (2001)
claimed that there is strong evidence that a separate market for broadcasting rights of football events exists. Hernando & Harbord & Von Graevenitz (1999) also concluded that
“sports broadcasts achieve the same or similar sized audiences whether or not they are competing with simultaneously broadcast sports events… and that the events in question are not substitutes for each other in the preferences of viewers ”.
As mentioned before, substitutability on the supply side might be important too, since other firms could supply exchangeable products if a price rise occurs. However, due to exclusive contracts, other broadcasters are banned from supplying additional football coverage if demand increases. Exclusivity is a common phenomenon in the selling procedure of the broadcasting rights of football and it is the reason why supply inelasticity exists. Due to exclusive contracts, supply substitutability on the short term is very low. Since there are no close substitutes for live football coverage, the relevant market at the upstream level is the market for broadcasting rights of live football coverage.
Now that we established that the relevant product market on the upstream level is the market for broadcasting rights of live football coverage, we have to establish the relevant geographical market. This will be dealt with in the next section.
4.3 Relevant geographical market
Since the main focus of this paper is on the sale of broadcasting rights of premier league football, the relevant geographical market at the upstream level where these rights are sold will be primarily examined. In order to determine the relevant geographical market, according to the NMa (2003), one should examine which firms from which geographical areas compete with each other. The area where supply and demand of the products involved exercise a competitive constraint upon each other determines the relevant geographical market. Markets in the broadcasting industry are usually national due to cultural and linguistic barriers and/or technical difficulties. But is this also the case for sports, where language is of no importance? Thereby, nothing is more multicultural than sports. Indeed, Harbord &
Hernando & Von Graevenitz (1999) said: “…the Commission takes the view that there are at
least two different antitrust markets: one for the acquisition of the television rights to sports
events of a pan-European or international interest, and another for the acquisition of the
television rights to sports events of purely national interest”. For instance, the sales of
broadcasting rights of European Football Championships and of Tennis Grand Slams are
obviously of international interest. But since we’re mainly concerned with the recent sale of
Dutch broadcasting rights of football, which is of national interest, we focus on the Dutch
broadcasting market of football in this paper. Broadcasting rights of national football premier
leagues are also sold to foreign broadcasters, but the revenues of these sales are considerably lower than the sales of broadcasting rights of the domestic football premier league. In The Netherlands, for example, foreign premier leagues of football only amount to 0.2-5.5% of the revenues for the rights of Dutch premier league football matches, according to the NMa (2003).
However, in the future there could very well be one large European sports
broadcasting industry, but for now the focus is on the Dutch market.
5 Hotelling model for the sale of premium broadcasting rights
In this section, a theoretical model for the sale of premium broadcasting rights, such as the broadcasting rights of live football matches, will be given. This model explains the incentives for the upstream rights seller as well as the downstream buyers how to sell these premium broadcasting rights in various situations. We shall adopt the same analysis as Armstrong (1999) and Harbord & Ottaviani (2001). First, in subsection 5.1, the basic concepts of competition in the pay-TV market in a Hotelling model will be laid down.
Distributors are not included in this analysis of the model. Hence, access tariffs are also not included. It is simply assumed that broadcasters sell their products directly to consumers.
The exclusion of distributors and access tariffs does not fundamentally change the outcomes of the model. In subsections 5.2 and 5.3, respectively, the incentives of different selling procedures for the downstream broadcasters and the upstream rights seller will be discussed. Premium broadcasting rights can be sold exclusively or non-exclusively. If the upstream rights owner sells these rights exclusively, then the downstream firm that acquired the rights could resell these rights to its competitor. Non-exclusive rights cannot be resold, so that if the upstream rights owner chooses to sell its rights non-exclusively, there is no
wholesale market for these rights. In this section it is assumed that the premium
broadcasting rights can be (re)sold either for lump sum fees, fees per subscriber, or two part tariffs. Conclusions of this section are drawn in subsection 5.4.
5.1 Competition in the pay-TV market
A basic Hotelling model is used in this section. Consumers are located on an interval x ∈ [0,1]. They are located uniformly over the interval and have mass unity. There are assumed to be two broadcasters, firm A and firm B. Firm A is located at 0 and firm B at 1.
The broadcasters sell horizontally differentiated products, which means that at the same price some consumers prefer the one product to the other. This difference in consumers’
preference of products is suggested by the location of consumer x on the unit interval and it may originate from the distribution method of broadcasting (cable, satellite, ADSL) or from the different “basic” products offered by the firms. This difference in consumers’ preference of products is reflected in this model by the variable t.
Each consumer achieves net utility u
i- tx - p
ifrom buying a product from firm i at a price p
i, with i = A,B.
Firm i has marginal cost of supplying its product to consumers of c
i, with i = A,B.
Furthermore, firm A is assumed to have a competitive advantage, which is represented by s
A≥ s
B, where s
iis the maximum surplus firm i can achieve per subscriber, s
i= u
i- c
i≥ 0.
Quantity sold by firm i is noted by x
i(s
A,s
B) and firm i' s profits by π
i(s
A,s
B).
Another variable used here is v
i= u
i- p
i, consumer’s utility net of prices charged, so that the marginal profit per subscriber is p
i- c
i= s
i- v
i.
Firm i' s profits can be found as usual by π
i= (p
i- c
i)x
i≡ (s
i- v
i)x
i. Total welfare (W) can be measured by adding total consumer surplus (V) and both firms’ profits.
So, total welfare W = V + π
A+ π
B.
The indifferent consumer x~ is located at:
u
A- t x~ - p
A= u
B– t(1- x~ ) – p
B⇔ 2t x~ = u
A– p
A– u
B+ p
B+ t = v
A– v
B+ t.
Hence,
t v x v
t v
x v
A B i i j2 2
~ 1 2
2
~ 1 −
+
− = +
= . (1)
Now we simply maximize profits:
−
+
−
=
−
= t
v v v
s x v
s
i i i i i i ji
2 2
) 1 (
)
π (
with respect to v
i. Equilibrium results are denoted with
*. The equilibrium result for v
iis:
v
i*= s
is
jt
− − 3
2 . (2)
Using the result of v
i*we can obtain the equilibrium outputs x
i*, profits π
i*and prices p
i*. x
i*t s s
i j6 2
1 −
+
= (3)
π
i*2
3 2
1 −
+
= s
is
jt t (4)
p
i*3
2
ij j
i
u c c
t u − + +
+
= (5)
Consumer surplus can be found by adding the surplus of consumers that bought from firm A and the surplus of consumers that bought from firm B, respectively.
So,
−
− +
−
=
~ ~1 *0
*
*
( ) ( ( 1 ))
x B
x
A
tx dx v t x dx
v
V .
Using equation (1) with
t v
x v
A B2 2
~ = 1 +
*−
*, this means that:
( )
4 ) 4
2 (
1
* * * * 2*
