TV wars: content and competition in pay-TV

1. TV wars: content and competition in pay-TV Helen Weeds, University of Essex 5th Workshop on Media EconomicsBologna, 19-20 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: 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

11. 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

12. 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)

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(si) s.t. b' > 0, b'' > 0 • Motivation • sit+1 and pit+1 both increasing in sit • E.g. models of switching costs, network effects, quality investment • (ignore advertising)

15. Solving the model • Quadratic form: b(si) = ½si2 • 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 si widens in v • As v increases, 1st then 2nd 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: 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

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