The visible hand in economics

SKY TV and the market for live sport

Posted on: November 25, 2008

The previous Labour government bestowed a legacy upon NZ that included the first ever review of broadcasting regulations.

Essentially the question being asked in this review is: does the current market situation warrant government intervention?

Firstly, let’s look at the market. In NZ, there are essentially three players in the television market. TVNZ is the free-to-air state broadcaster (Channels One, 2 and other Freeview offerings). CanWest is a private sector free-to-air broadcaster (TV3 and C4). SKY TV is the pay-tv competitor, which crucially also owns the free-to-air Prime channel. Free-to-air networks financially depend on advertising (and in the case of TVNZ, government funding too) while pay-tv networks depend largely on subscriptions from viewers.

SKY commonly purchases ‘big’ sporting events, such as rugby league and union test matches, to show on its pay-tv channels, with delayed replays on free-to-air Prime. Critics suggest that this arrangement is unfair as it allows them to ‘siphon’ sports events from free-to-air to pay-tv and consequently ‘hoard’ them. Sensationalist terms such as “astonishing dominance” and “free-to-air under threat” are used in the article cited above, for example.

The reality is that 45% of the population has SKY, while 91% of the population can get Prime on terrestrial (i.e. not digital) coverage. This implies that 45% of the population can view such matches live, 46% can view them delayed, while 9% can’t watch the match at their place of residence. 9% is a relatively small proportion of the population, particularly when you take into account that they could watch the game at a local bar or friend’s house, for example, should they really wish to see it. Similarly, those with only delayed coverage at their place of residence could watch the game live elsewhere should they so desire.

In my opinion, the way SKY are segmenting the market is pretty clever – they are able to extract surplus from those prepared to pay for live sport, while at the same time provide a lower-quality (delayed) alternative for the vast majority of those not prepared to pay for it. And if someone is not prepared to incur any cost (financial and/or effort) to watch the game (either delayed or live), then they probably don’t value the game that highly.😉 In this sense, I don’t see any argument for intervention, as consumers are ultimately in control of how they consume such sport.

Furthermore, there is a strong degree of self-regulation occurring in the market. Just last month SKY announced a collaboration with TVNZ and CanWest to share TV coverage of the 2011 Rugby World Cup. SKY are aware that appearing too dominant would not help its public image (and hence its image in the government’s eyes).

I see no reason for the pay-TV market in New Zealand to be regulated. Consumers are currently able to access what they want at the appropriate price, while SKY is obviously mindful of not abusing it’s position as the sole provider of pay-TV here. Indeed, greater regulation of the market would probably scare away potential new entrants, which I think would be a lot more beneficial for the market than any form of government intervention, in terms of introducing new technologies faster and cheaper, as well as other efficiency gains associated with increased competition.

12 Responses to "SKY TV and the market for live sport"

The real issue here is freeview. That sky (and particularly prime) is not part of freeview. In addition for a while sky was refusing to do the free channels in HD and TV3 and TVNZ were both threatening to stop their channels being offered on Sky.

My understanding is that the government wants to force prime into joining up with freeview. (and additionally maintain the free chanels on sky, hopefully in HD)

your description of sport is absolutely right and I completely agree. those who value sport should pay for it.

but the issue, and the reason for the investigation is that sky is using abusing its dominant position and blackmailing the free to air broadcasters.

“but the issue, and the reason for the investigation is that sky is using abusing its dominant position…”

There are two ways to remedy the problem of a single party using their dominant position abusively.

1. Regulate them. Then reregulate them more when they figure out a way around that. Then regulate them more…

2. Make it easier for competitors to enter the market and remove the companies dominance.

The first one is very difficult to get right, and frankly, I doubt you could actually do it without adding absurd costs.

The issue appears to be the contention that sky is extending it’s market power in the pay TV market into the free-to-air market.

I agree that people who want to watch live sport should have to pay for it, but the question is whether sky is using their position in the pay tv market to stifle the competition in the free-to-air market.

It will be interesting to see what happens if the free-to-air channels push for divestment or anti-siphoning laws.

@ Kimble

1. Anti-siphoning or divestment seam a pretty simple way to go if you think sky is extending it’s market power into free to air tv, not really sure how sky could game that?

2. What market are you referring to? we already have other free-to-air cahnnels so I assumes you mean somthing else. Are you referring to the market for either “dealyed sport” or “live sport”?

“1. Regulate them. Then reregulate them more when they figure out a way around that. Then regulate them more…”

Agree, regulatory creep is something we should avoid; but this doesn’t mean no regulation. it simply means well designed regulation, and only as a last resort. My expectation is that the threat of regulation may be enough to encourage some kind of resolution in the form of an undertaking from freeview & sky.

“The issue appears to be the contention that sky is extending it’s market power in the pay TV market into the free-to-air market.”

Bang-on; thanks for explaining what I couldn’t explain properly.

“2. What market are you referring to? we already have other free-to-air cahnnels so I assumes you mean somthing else. Are you referring to the market for either “dealyed sport” or “live sport”?”

I was refering to the market for free-to-air TV. forget what the content is, that doesn’t matter.

If the market is for free-to-air tv and there isn’t a seperate anti-trust market for delayed sports coverage, then the quesition is whether Sky giving Prime all the delayed sports events substantially lesson competitoin int eh free-to-air market.

If there was a substantial leesononing of competition in this market, one would have thought the free-to-air netowrks or the Commerce Commision would have taken Sky to court. The fact that they are taking the public policy route speaks volumes in this regard.

my point was that it has nothing to do with sport.

the government, (and tvnz & MediaWorks) are concerned about what will happen post 2012 when analogue is switched off. And i’m pretty sure the negotiations were heading toward a major court battle prior to the government’s announcement to investigate.

ahh, sorry.

I can see what you mean RE the digital platform. It sounds like there is a bunch of gaming going on from both sides.

When analogue goes, I’m not sure what incentive Sky would have to not put Prime on FreeView. Unless they want to just kill FreeView and make sky the only feasible digital platform.

Does Sky pay for the free-to-air channels it screens or do they pay sky or does no money change hands?

[…] details: SKY TV and the market for live sport « The visible hand in economics […]

don’t quote me on this but I believe tvnz and tv3 pay for sky to broadcast the channels. similarly tvnz and tv3 (and whoever else is there too) pay freeview for broadcasting those chanels.

My view is that Sky was trying to game it to make them the only feasible digital platform (freeview would still be feasible, but significantly less desirable to most viewers).

By doing an investigation the threat of regulation may be enough to resolve the situation.

Agnitio says:

“I agree that people who want to watch live sport should have to pay for it,”

Maybe. But I think this is restrictive and back to front. In my view it makes more sense to frame this as:

“The people who own the rights to sports programming should be able to maximise the return on their investment by selling it to subscribers if they choose”.

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