Thirty years ago, Bruce Springsteen complained that cable TV had “57 channels and nothin’ on”. Our viewing options have since proliferated on digital networks and many observers are hailing a new golden age of high-quality content. Yet premium programs such as sports events or Hollywood movies are often restricted to a single network. Why? In a new paper for The Rand Journal of Economics, TSE’s David Martimort teamed up with Jérôme Pouyet (ESSEC) to study exclusive pay-TV agreements and whether regulators should step in to improve competition.
What piqued your interest in pay TV?
As a viewer, I have always been concerned by how broadcasting rights for sports events, especially soccer, have been distributed. This issue has recently hit the headlines with the debate on the price that supporters must now pay to watch their favorite sport.
Upstream and downstream competition are deeply intertwined in the pay-TV market. Upstream, TV firms compete through bidding procedures to obtain must-have contents from content owners such as sports leagues and film studios. Firms’ willingness to pay depends on how those contents might help them gain market shares downstream, where they compete on price and quality to attract viewers. Downstream quality, in turn, depends on the distribution of broadcasting rights inherited from upstream.
A remarkable feature of pay-TV markets is that broadcasting rights for a class of premium contents seem to be highly concentrated. As an economist, I wanted to investigate why this happens. Which economic forces drive such concentration? Why would a content owner choose to pick a single winner and not spread out rights across rivals to reach more viewers? How prevalent is the exclusivity outcome? Does it harm welfare? If so, how should regulators intervene?
How does your paper study the origins and impact of exclusive agreements?
We build a simple model of two-sided competition that takes into account the interplay between upstream competition for broadcasting rights and downstream competition to attract viewers. Upstream, bidding strategies must keep an eye on how the allocation of viewers across channels will impact downstream profits. Downstream, firms must consider that content quality depends on how the upstream market is cleared, which itself depends on downstream profits and the quality of programs.
This circularity is at the core of our analysis. We observe that giving exclusive broadcasting rights to a dominant firm maximizes the industry profit. This finding holds for all equilibria when firms can freely bid for any possible allocation of rights that increases profits. Under a broad range of modes of downstream competition, a dominant firm gains more from obtaining exclusive rights upstream than it would lose if those rights were given to a weaker competitor. The dominant firm then compensates the seller (or pays even more) for the foregone opportunity of not having sold to the weaker firm.
How have regulators responded to the prevalence of exclusive broadcasting rights?
The presumption often made in related antitrust cases is that the gains of exclusivity can be redistributed to viewers. However, exclusive agreements might also be considered as reducing downstream competition for viewers and thus hindering consumer surplus. If the industry equilibrium fails to maximize welfare, this calls for some sort of public intervention.
Reflecting this tension between the efficiency gains of exclusivity for the industry and its negative consequences on viewers, competition authorities often taken different postures. In North America, case law specific to sports media views exclusive agreements as a priori legal. In contrast, the European Commission has insisted that open, transparent and non-discriminatory tenders be used to sell UEFA Champions League broadcasting rights, with several packages on offer that cannot all be exclusively acquired by a single bidder, and imposing time limits on exclusivity.
Pay-TV markets often feature the resale of rights, sometimes even between firms that were earlier competitors at the bidding stage. This has often been viewed by practitioners as a means for a dominant firm to increase its monopoly power by buying back rights sold earlier on. As most procedures for broadcasting sports events feature the simultaneous sale of multiple rights, some competition authorities have suggested that market dominance could be undermined by splitting upstream auctions into smaller tender procedures.
Competition authorities also differ in their assessments of whether sports leagues that coordinate the selling of broadcasting rights on behalf of teams form a cartel and thus harm competition. Future research could extend our model to take into account the joint and individual selling of broadcasting rights and analyze how this impacts vertical agreements between sellers of rights and pay-TV firms.
Should we ban resale of rights and package bidding?
If corrective policies like these are called for to prevent dominance, their design should be based on a full characterization of equilibrium payoffs. An important takeaway of our analysis is that these light-touch regulatory tools – banning resale of rights or limiting tender size in the case of multiple rights – have no impact on the allocation of rights. At best, they only impact the distribution of profits.
Our research suggests that competition authorities will need more heavy-handed tools to avoid exclusivity. For example, the European Commission required the UK’s Premier League to ensure at least one package of media rights to its soccer matches would go to a non-dominant operator. Similar ‘no single buyer’ rules are now almost always implemented by major European soccer leagues. Rather than systematically forcing a competitive outcome, we believe this issue should be resolved on a case-by-case basis.
FURTHER READING ‘Why Is Exclusivity in Broadcasting Rights Prevalent and Why Does Simple Regulation Fail?’ and other publications by David Martimort are available to read on the TSE website.
Article published in TSE Reflect, September 2024
