Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
Initially Apple intended not to pay artists royalties during this trial period. However, it soon reversed this plan when the pop-star Taylor Swift wrote a blog post criticising Apple for this and threatening to withhold her most recent album.
The negotiations between Apple and the record labels are also facing considerable scrutiny from the competition authorities on both sides of the Atlantic. They seem particularly concerned that Apple may have conspired with or pressured labels to withdraw their support for rival streaming services such as Spotify that offer free versions to consumers. Although not clear, it has been suggested that the European Commission’s initial probe into this may have been initiated by a complaint from a company offering such a free version of its service.
On the other hand, there has also been considerable criticism of free music services such as Spotify. One of the cofounders of the Beats music streaming service, which was subsequently acquired by Apple, has argued that the free business model does not properly value recorded music. Likewise, Taylor Swift removed her entire back catalogue from Spotify, and the leading record label, Universal, is applying pressure on Spotify to change its business model. It is currently unclear whether Apple has been directly responsible for Universal’s standpoint. What is clear is that Apple’s entry will shake-up this market and the identity and business model of the future market leader is at stake.
Streaming sets off a painful debate in the music industry Financial Times, Jonathan Ford (22/03/15)
Apple’s new music service will push paid subscriptions, with free samples re/code, Dawn Chmielewski and Peter Kafka (08/05/15)
Taylor Swift is fighting the wrong part of the music industry Financial Times, Jonathan Ford (05/07/15)
Here’s what happens to your $10 after you pay for a month of Apple music re/code, Peter Kafka (15/06/15)
Questions
- What are the key features of the music streaming service market?
- What are the pros and cons of Spotify’s business model?
- Why might the views on free streaming services differ between small and large artists and labels?
- How do you think the music streaming market might develop in the future?
Many of the major industries in Australia are oligopolies/oligopsonies. Examples include banking, telecoms, supermarkets, insurance and iron ore. The dominant firms in these markets have been accused of exploiting their market power, both in charging high prices to consumers and driving down the prices paid to suppliers. The result, it is claimed, is that they have been making excessive profits.
But things may be changing. With the rise of online trading, barriers to entry in these markets have been falling. Many of the new entrants are established firms in other countries and hence already have economies of scale.
The first article below examines the challenge to established oligopolists in Australia.
Articles and blogs
The death of the oligopoly: Australia’s incumbents face new rivals Financial Review (Australia), Michael Smith (21/4/15)
Australian Oligopolies The Grapevine, Adam Dimech (27/12/14)
Paper
Breaking up Australia’s oligopolies Ashurst Australia (14/8/13)
Questions
- Find out which are the major firms in Australia in the five industries identified above. What is their market share and how has this been changing?
- What barriers to entry exist in each of these industries in Australia? To what extent have they been declining?
- What can new entrants do to overcome the barriers to entry?
- What technological developments allow other companies to challenge Foxtel’s pay television monopoly?
- To what extent are developments in the supermarket industry in Australia similar to those in the UK?
- To what extent does Australia benefit from increased globalisation?
The recent low price of oil has been partly the result of faltering global demand but mainly the result of increased supply from shale oil deposits. The increased supply of shale oil has not been offset by a reduction in OPEC production. Quite the opposite: OPEC has declared that it will not cut back production even if the price of oil were to fall to $30 per barrel.
We looked at the implications for the global economy in the post, A crude indicator of the economy (Part 2). We also looked at the likely effect on oil prices over the longer term and considered what the long-run supply curve might look like. Here we examine the long-run effect on prices in more detail. In particular, we look at the arguments of two well-known commentators, Jim O’Neill and Anatole Kaletsky, both of whom have articles on the Project Syndicate site. They disagree about what will happen to oil prices and to energy markets more generally in 2015 and beyond.
Jim O’Neill argues that with shale oil production becoming unprofitable at the low prices of late 2014/early 2015, the oil price will rise. He argues that a good indicator of the long-term equilibrium price of oil is the five-year forward price, which is much less subject to speculation and is more reflective of the fundamentals of demand and supply. The five-year forward price is around $80 per barrel – a level to which O’Neill thinks oil prices are heading.
Anatole Kaletsky disagrees. He sees $50 per barrel as a more likely long-term equilibrium price. He argues that new sources of oil have made the oil market much more competitive. The OPEC cartel no longer has the market power it had from the mid 1970s to the mid 1980s and from the mid 2000s, when surging Chinese demand temporarily created a global oil shortage and strengthened OPEC’s control of prices. Instead, the current situation is more like the period from 1986 to 2004 when North Sea and Alaskan oil development undermined OPEC’s power and made the oil market much more competitive.
Kaletsky argues that in a competitive market, price will equal the marginal cost of the highest cost producer necessary to balance demand and supply. The highest cost producers in this case are the shale oil producers in the USA. As he says:
Under this competitive logic, the marginal cost of US shale oil would become a ceiling for global oil prices, whereas the costs of relatively remote and marginal conventional oilfields in OPEC and Russia would set a floor. As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50.
So who is right? Well, we will know in twelve months or more! But, in the meantime, try to use economic analysis to judge the arguments by answering the questions below.
The Price of Oil in 2015 Project Syndicate, Jim O’Neill (7/1/15)
A New Ceiling for Oil Prices Project Syndicate, Anatole Kaletsky (14/1/15)
Questions
- For what reasons might the five-year forward price of oil be (a) a good indicator and (b) a poor indicator of the long-term price of oil?
- Under O’Neill’s analysis, what would the long-term supply curve of oil look like?
- Are shale oil producers price takers? Explain.
- Draw a diagram showing the marginal and average cost curves of a swing shale oil producer. Put values on the vertical axis to demonstrate Kaletsky’s arguments. Also put average and marginal revenue on the diagram and show the amount of profit at the maximum-profit point.
- Why are shale oil producers likely to have much higher long-run average costs than short-run variable costs? How does this affect Kaletsky’s arguments?
- Under Kaletsky’s analysis, what would the long-term supply curve of oil look like?
- Criticise Kaletsky’s arguments from O’Neill’s point of view.
- Criticise O’Neill’s arguments from Kaletsky’s point of view.
- Will OPEC’s policy of not cutting back production help to restore its position of market power?
- Why might the fall in the oil price below $50 in early 2015 represent ‘overshooting’? Why does overshooting often occur in volatile markets?
Most observers were once again left stunned by how much media companies are willing to pay to secure the rights to broadcast live games in the English Premier League (EPL). At the same time the method used to sell those rights is being investigated by Ofcom following complaints made by Virgin Media. Virgin Media actually requested that the auction was halted until the investigation was completed.
Between them, BSkyB and BT Sport have paid £5.136bn to purchase the rights to broadcast live matches in the EPL over a three-year period beginning in the 2016–17 season. This is a 71% increase in the price paid for the previous three-year deal which runs from 2013 to 2016 and cost £3.018bn. However, the headline figure hides some big differences between the amounts paid by the two companies.
How exactly are the rights sold? The broadcast rights for the 168 live matches are split up into seven different packages labelled A through to G and are placed in seven different auctions. The type of auction used by the EPL is a sealed bid auction. Interested companies are invited to make an offer for any of the packages. However, when they make a bid they do not know (a) if other firms have also made a bid and (b) the size of any other bids. Another constraint is that one firm is not allowed to win more than five of the auctions. When the auction finishes the EPL only releases information about the winning offers. It never provides information about any of the failed bids.
Some of the packages are worth more than others to the broadcasters. The first five packages (A–E) each contain the rights for 28 games per season, while the other two packages (F and G) contain the rights for 14 matches. In some of the packages all of the games kick off at the same time and on the same day. For example all 28 games in package ‘A’ kick off at 12.30pm on a Saturday. Others contain more of a mixture. Some of the games in Package E take place on a Monday evening. while others take place on a Friday evening. Given the potential advertising revenue and number of viewers, the most valuable package is D, which has 28 games that kick off at 4.00pm on a Sunday.
Another factor that influences the value of a package is the number of ‘first picks’. In any given week, more than one broadcaster might want to screen the same match. To overcome this problem, each package is allocated a number of first, second, third, fourth and fifth ‘picks’. For example, package D comes with 18 first and 10 fourth round picks. This means that whichever company wins this package will get first choice on the games they want to broadcast on 18 occasions a year. Package C contains no ‘first picks’ but offers 15 second, 4 fourth and 7 fifth round picks. There is also a maximum and a minimum limit on the number of times games including a specific team can be broadcast.
BSkyB won the auctions for packages A, C, D, E and G for a price of £4.17bn. This means that it will be paying £1.396bn to broadcast 126 live games per season. This is an average payment of £11,031,700 per game. In the previous deal it paid £760million for the rights to broadcast 116 live games per season. This is an average payment of £6,551,724 per game. The new deal represents a cost increase of 68% per game. However, the number of first picks BskyB has secured in the new deal increases from 20 to 26.
BTSport won the auctions for packages B and F for a price of £960m. This means that it will be paying £320m for the rights to broadcast 42 live games per season. This is an average payment of £7,619,048 per game. In the previous deal it paid £246 million per year for the rights to broadcast 38 live games per season. This is an average payment of £6,473,684 per game. The new deal represents an increase in costs of 17.7% per game for BT Sport – a much lower figure than for BSkyB.
BSkyB has stated that it will cover the increase in the price it has paid for the rights with efficiency savings. However, many observers believe that it will ultimately result in significant increases in the subscription rates for SkySports. The impact of the deal on BskyB’s profit may well depend on the willingness of its customers to pay higher prices. What is the price elasticity of demand for SkySports at the current subscription rates they are charging?
There is still some uncertainty about the deal following Ofcom’s decision to investigate the legitimacy of the method used by the EPL to auction the rights. Virgin Media made a formal complaint in September 2014 about the collective selling of the live broadcast rights and argued that it was in breach of competition law. The investigation by Ofcom will make a judgment about whether the joint selling of the rights by the EPL is a contravention of Chapter I of the Competition Act 1998 and/or Article 101(1) of the Treaty on the Functioning of the European Union. An initial announcement will be made in March.
Premier League set to announce record £4.4bn TV rights deal BBC Sport (10/2/15)
Premier League TV rights: What does deal mean for fans & clubs BBC Sport, Ben Smith (11/2/15)
How Sky paid £4m more per Premier League match than BT The Telegraph, Ben Rumsby (11/2/15)
Premier League TV deal: Windfall must benefit grass roots and England The Telegraph, Henry Winter (10/2/15)
Sky and BT retain Premier League TV rights for record £5.14bn The Guardian, Owen Gibson (10/2/15)
Premier League TV rights: Sky Sports and BT Sport win UK broadcasting rights as price tops £5billion Independent, Tom Peck (10/2/15)
Questions
- Draw a demand curve for package A and package D of the live broadcast rights. Which one do you think will be furthest to the right? Explain your answer.
- What are the potential benefits to the EPL of not revealing the details of any of the losing bids?
- Explain how the price elasticity of demand is a useful concept for assessing the impact of the new deal on the profits of BSkyB and BTSport.
- Given the impact of the new deal of the size of Parachute payments, what impact might it have on the level of competitive balance in the Championship?
- Find out the key provisions of Chapter I of the Competition Act 1998 and Article 101(1) of the Treaty on the Functioning of the European Union.
Virtually all manual toothbrushes sold in the UK are made by Oral B (Procter & Gamble), Colgate (Colgate-Palmolive) or Listerene Reach (Johnson & Johnson). This is a powerful oligopoly.
The manufacturers distribute toothbrushes primarily through large powerful retailers, such as supermarkets and Boots. It is difficult for new entrants to persuade these retailers to stock their product. What is more, with large advertising and marketing budgets, existing toothbrush manufacturers make it difficult for new brands to attract customers.
But one company has successfully entered the children’s section of the market when Boots 
agreed to stock its product. The Rockabilly Kids toothbrush has a feature likely to appeal to both children and their parents. It wobbles! With a weight in the bottom, the brush rights itself, with a wobble, when dropped or simply placed on the basin or shelf.
This clearly appeals to small kids. It also appeals to their parents who can do away with unhygienic toothbrush holders. What is more, the self-righting wobbly toothbrush, by making the whole process of teeth cleaning fun for young kids, can help them gain good habits of oral hygiene.
So just how did the manufacturer overcome the barriers to entry into this well-established oligopoly? The following article examines how.
Can ‘wobbly’ kids toothbrushes shake the Oral B/Colgate oligopoly? The Telegraph, Rebecca Burn-Callander (10/1/15)
Questions
- What barriers to entry exist in the manual toothbrush market?
- How did Hamish Khayat overcome these barriers?
- Why did he decide against a toothbrush subscription service?
- How would you decide whether £6.99 is the right price?
- Is it a good idea for him to diversify into electric kids toothbrushes?
- How are the big toothbrush manufacturers likely to respond to the expansion of Rockabilly Kids?
Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
