Competition issues on regulation of access to media content

1
Competition issues on regulation of access to
media content

• Juanjo Ganuza
• Universitat Pompeu Fabra, Barcelona GSE, FEDEA
• FEDEA WORKSHOP ON REGULATION OF ACCESS TO MEDIA
  CONTENT
• Madrid, November 15th, 2007

2
Overview

• The broadcasting industry
• Regulatory issues
• The pay TV industry in Spain

3
The value chain of the broadcasting industry
Programme production
Channel packaging
Transmission
Revenue generation
4
The value chain of the broadcasting industry
Programme production
Making a movie, filming a sports event, etc.
Channel packaging
Transmission
Revenue generation
5
The value chain of the broadcasting industry
Programme production

• Acquisition of contents
• Scheduling programmes into channels, packaging,
  etc.

Channel packaging
Transmission
Revenue generation
6
The value chain of the broadcasting industry
Programme production
Channel packaging

• Historically, few channels free-to-air
  transmission
• Recently, many more channels cable, satellite,
  DTTV, etc.

Transmission
Revenue generation
7
The value chain of the broadcasting industry
Programme production
Channel packaging

• Pay TV direct viewer charges on a subscription
  or pay-per-view basis
• Free-to-air the sale of airtime to advertisers
• Two sided market

Transmission
Revenue generation
8
The broadcasting industry in the digital era

• Digitisation major technological change
• replaces analogue signals with digital format
• lowers the cost of content production.
• More importantly, digital format increases a lot
  the number of channels that can be broadcast

9
Transmission capacity in the digital era

• BEFORE In analogue broadcasting, transmission
  capacity forms a major barrier to entry
• Few number of channels they are restricted by
  spectrum availability
• NOW With digital transmission, spectrum
  constraints on the number of channels are removed
• Many channels and scarcity rents are eliminated
• Transmission is not a barrier to entry any more

10
Market power in the broadcasting industry

• Where does market power lie now in the
  broadcasting industry?
• The control of premium contents
• There are few producers and holders of rights on
  premium contents TV contents
• Sports, Hollywood movies, etc
• Premium contents are key for demand
• UK in 1997 25 of the first 30 programmes on
  Satellite Television were soccer games
• There has been a shift of market power from
  transmission to content supply

11
Market power in the broadcasting industry

• There has been a shift of market power from
  transmission to content supply

Now
Before
Premium content
Transmission
12
Regulatory issues

• A deep change in the regulation of media is
  called for
• Regulation in general has experienced a big
  change in paradigm
• Before regulation of natural monopolies and
  promoting competition for the market (e.g.
  auctioning spectrum licenses)
• Now regulation is devoted to fostering
  competition in the market
• Because technological changes have challenged
  monopolies in many industries and segments of the
  value chain
• The shift of market power from transmission to
  content supply requires a change in the
  regulation of media
• Specifically, we have to put the emphasis in the
  regulation of contents access over the
  regulation of transmission.

13
Regulatory issues

• This conference studies the regulation of access
  to contents in the pay TV markets
• The focus will be on the interaction of the
  owners of premium content and the pay TV retail
  distributors
• Specifically, we need to have a good
  understanding of the following layers of the
  value chain of the media industry
• Market of content acquisition
• Market of content resale
• Market of retail sales

14
Upstream Stage Rights Owners
VERTICAL RELATIONS IN THE BROADCAST MARKET
Intermediate Stage Television Broadcasters
Market of Content Resale
Market of Content Acquisition
Downstream Market Retail Distributors (either
satellite, cable or digital terrestrial, and
Free-air-TV)
Pay TV subscribers
Advertisers
Market of Retail Sales
15
Regulatory issues

• Some issues
• Exclusivity distribution of premium TV contents
• Bundling and competition
• The possible role of auctions as a regulatory
  tool.

16
Exclusivity

• Exclusivity over premium content may be
  anti-competitive
• Competition authorities have in recent years
  expressed concern over the sale of premium
  content rights on an exclusive basis
• Potential problems with exclusivity of premium
  contents
• Higher prices of the people that consume premium
  content
• Some people do not have access to the premium
  content
• May be an entry barrier to potential competitors
• Usually, the market dominant firm is the one that
  will acquire exclusively premium contents
• Armstrong (1999) without regulatory constraints,
  exclusivity is a likely outcome

17
Armstrong, 1999
Exclusivity is a likely outcome
Premium content

• Industry profits are largest with exclusivity
  over premium content
• Industry players become more differentiated
  lowering competition
• Premium content acquisition is less attractive
  when the competitor already enjoys it
• Competition for premium content is likely to end
  up in exclusive dealing
• Who is going to get the content? Chicken egg
  dilemma scale economies more viewers imply
  better contents, and vice versa
• There is a persistent first mover advantage in
  the acquisition of premium content

S
broadcasters
A
B
18
Exclusivity

• Possibility of resale of premium contents
• Armstrong, 1999, considers resale for a fixed
  price, and shows is welfare enhancing, but not an
  equilibrium outcome
• Fiercer competition after resale
• Harbord and Ottaviani, 2001 considers resale with
  per-subscriber fees, which is an equilibrium
  outcome
• The exclusive holder can get additional revenue
  without increasing competition since it controls
  the marginal cost of the competitor typically,
  consumers are worse off

19
Exclusivity

• High minimum guarantees
• A practical concern in the resale market is the
  use of high minimum guarantees potentially
  important barrier to entry
• Small firms and new entrants have to pay upfront
  to the right holder a fixed fee independently of
  the number of subscribers
• Endogenous quality
• Stennek, 2006 exclusive distribution may give
  both providers of contents and distributors
  higher incentives to invest in quality
• To which extent the quality of premium contents
  is endogenous in the Spanish market?

20
Bundling

• Bundling is a big issue in the media industry
• Joint selling of content to broadcasters
• Sometimes there is compulsory split up of right
  selling
• Bundling and packaging content into channels, and
  channels into programming.
• Bundling of pay TV services with other products
  as internet and telecom services
• It is generally difficult to assert the impact of
  bundling over welfare

21
Bundling

• Bundling enhances efficiency
• Transaction and searching costs are reduced
• Complementarities among contents
• Watching one episode fosters the attraction of
  watching the next.
• but is dangerous for competition
• May serve as a barrier to entry.
• Dominant firms may offer additional content
  within the bundle almost free.
• Which is the level of fragmentation that
  guarantee an efficient trade-off between
  efficiency gains and competition?

22
Auctions

• Auctions of premium contents must be regarded as
  a necessary regulatory tool but not as a guaranty
  of solving the problem
• Dominant firms are likely to get through auctions
  the exclusive control of premium contents.
• Auctions must be designed for implementing
  specific competition policies and they have some
  advantages
• They are public mechanisms, they are fast in
  allocating rights, and they may prevent explicit
  discrimination.

23
Auctions

• Auction design of contents is complex, they are
  not standard auctions, more related with
• Auction with externalities, combinatorial
  auctions, and auction of market structure.
• Interesting research problem designing auctions
  that maximize welfare but guarantee enough
  returns of the investment of premium content
  owners and endogenously solve
• Whether or not, exclusive dealing must be
  supported by efficiency arguments.
• If there are any, the length and details of the
  exclusive contract - including the resale
  conditions to other operators
• The bundle of contents.

24
VERTICAL RELATIONS IN THE SPANISH BROADCAST
MARKET
Upstream Stage Rights Owners
Original Hollywood movies rights Holders
(producers), Spanish Football League Clubs (Copa
del Rey and La Liga)
Market of Content Acquisition
Intermediate Stage Television Broadcasters
SOGECABLE y MEDIAPRO
Market of Content Resale
ONO, Digital , Telefónica, Euskaltel, Telecable,
etc. (two Latter are regionals ).
Downstream Market Retail Distributors (either
satellite, cable or digital terrestrial, and
Free-air-TV)
Pay TV subscribers
Advertisers
Market of Retail Sales
25
Pay TV industry in Spain

• Upstream control of premium contents
• Until may of 2006, the market was dominated by
  Sogecable, that had exclusive rights on soccer
  and main Hollywood studios
• Sogecable is vertically integrated, also present
  at the retail distribution pay TV market
• Sogecable undertook resale of rights to other pay
  TV distributors under some regulatory constraints
• Now, Mediapro is challenging Sogecable in
  controlling premium contents, specifically soccer
  TV rights
• Downstream distribution retailers of pay TV
• Pay TV services are currently offered by
  satellite, cable and ADSL
• Sogecable dominates the downstream market with
  60 of subscribers and 80 of the revenues
• Previously, it owned the only analogue pay TV in
  Spain (Canal )
• Overall,

26
Pay TV industry in Spain

• There are some signals of poor performance of the
  Spanish pay TV market

of pay TV subscribers per household

• This raises some questions about current
  regulation

27
Some pending regulatory issues

• Should there be some constraint over exclusive
  dealing in the premium content market?
• Limiting long term contracts
• Fragmenting premium packages
• Regulating resale prices favoring fixed prices
  over per-subscriber fee, and banning high minimum
  guarantees
• Soccer is a key premium content in the Spanish
  pay TV market
• Fragmented supply, each club sells its rights
  individually
• A soccer TV transmission requires that the TV has
  the rights of both teams
• This complementarity implies there are efficiency
  reasons for bundling the rights.
• Regulated joint selling would allow for
  controlling market power through splitting the
  rights and introducing constraints over the
  exclusivity
• Could it be possible to design balanced auctions
  of premium content rights which foster
  competition downstream?