With the new Premier League football season only a week away, TV companies are heavily advertising the matches they will be showing. Until recently, BSkyB, having seen off competition from Setanta and ESPN, appeared to have an untouchable position in this market. However, competition now appears to be intensifying.
BT entered the market in 2012 by paying £738m for the rights to screen 38 Premier League matches a season for 3 seasons, with Sky showing another 116 matches. BT is clearly heavily backing its sports coverage with an initial outlay of £1.5b and them continuing to sign up high profile presenters and ambassadors including former players and a current manager.
Furthermore, BT dealt Sky (and ITV) a hefty blow last year when it outbid them to win the rights to exclusively show European club competition matches from 2015. Sky responded by saying that:
We bid with a clear view of what the rights are worth to us. It seems BT chose to pay far in excess of our valuation
If true, this would illustrate the winner’s curse which can arise in auctions. However, John Petter, chief executive of BT Retail, said that the deal demonstrated that BT Sport was committed to establishing itself in this market and countered Sky’s suggestion that they had overpaid by saying:
They would say that, wouldn’t they? Secretly, I’d expect them to be kicking themselves and full of regrets this morning
Clearly important to BT’s strategy is bundling its sports coverage in for free with their broadband packages. This is not without controversy since, at the same time as spending vast amounts of money to setup its sports coverage, BT is receiving large government subsidies to improve rural broadband provision.
An important forthcoming ruling from the Competition Appeal Tribunal will have a significant effect on how competition between BT and Sky develops. In this case Sky is accused of abusing its dominant position by refusing to supply BT’s YouView service with its sports channels at a reasonable wholesale price and could now be forced to do so.
It will also be fascinating to see how BT Sport’s strategy develops over time. BT is unlikely to continue 
to provide all its coverage for free once it includes the European matches that it has won the rights to show at great expense. It will also be fascinating to see the extent to which it continues to have success in winning broadcasting rights in the future.
Competition will inevitably push up the amount that the Premier League raises in the next rights auction. Current predictions are that these will be sold for over £4bn, up from £3bn in the previous auction. This will increase the amount the Premier League clubs receive and is also likely to further push up player wages. It remains to be seen the extent to which this will benefit viewers, not to mention pubs wishing to show the games some of whom have in the past looked for alternative solutions because of the high prices they have to pay.
BT wins court battle forcing review of Sky wholesale pricing decision The Guardian, Mark Sweney (17/02/14)
BT Sport does little to lift BT TV homes informitv – connected vision (01/08/14)
BT Sport continues to invest in football line-up MediaWeek, Arif Durrani (29/07/14)
Questions
- What are the key characteristics of the market for sports broadcasting rights?
- What are the pros and cons for consumers of BT Sport’s emergence?
- How do you think Sky might respond to competition from BT Sport?
- How do you think BT Sport’s strategy might develop over time?
The Competition and Markets Authority (CMA), launched in October 2013, has been operating since April of this year. It is the successor to the Office of Fair Trading (OFT) and the Competition Commission. One of the current cases under investigation by the CMA is that of suspected criminal cartel activity in the supply of galvanised steel tanks.
On 11 July, Clive Geoffrey Dean, a former director of Kondea, and Nicholas Simon Stringer, a former director of Galglass, appeared before Westminster Magistrates Court. They were charged with dishonestly agreeing with others to divide customers, fix prices and rig bids between 2004 and 2012. The deals were with a number of companies. The charges are under section 188 of the Enterprise Act 2002.
This is the second prosecution in this case. On 17 June 2014, Mr Peter Nigel Snee, Managing Director of Franklin Hodge Industries, pleaded guilty to similar charges.
Under the Act, directors found guilty face custodial sentences of up to 5 years and unlimited fines. The CMA and government are keen to send the message that they will not tolerate cartels and that board members had better beware of colluding with other companies. Indeed, the CMA is committed to pursuing cases of suspected criminal cartels more frequently and more rigorously.
The question is whether this will deter criminal collusion or whether it will simply make companies more careful to keep collusion hidden from the authorities.
Two men face charges in ongoing criminal cartel investigation CMA Press Release (11/7/14)
The First Real Test of Sentencing for the UK Cartel Offence Competition Policy Blog: UEA/ESRC/ccp, Andreas Stephan (24/6/14)
An Important Watershed in the CMA’s Prosecution of the Criminal Cartel Offence Eversheds (18/6/14)
Questions
- What types of restrictive practices constitute ‘cartel agreements’?
- In what ways are cartels against the interests of their customers?
- Are there any ways in which consumers might gain from a cartel?
- What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
- Find out what other cases are being considered by the CMA. Choose one or two and examine how the activities of the firms/people involved might adversely affect consumers or other firms.
- Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?
One example of an oligopoly was recently discussed on this blog –supermarkets. Here, is another classic example: the energy sector. It is dominated by six big firms, which hold the majority of the market in an industry with high barriers to entry; there is inter-dependence between the firms; and there are accusations of price fixing and collusion – all typical features of an oligopoly that may operate against consumers’ interests.
There have been numerous investigations into the actions of these energy providers, owing to their high prices, a lack of competition and significant profits. Developments in the industry have focused on reducing the barriers to entry created by the vertical integration of the incumbent firms in order to make it easier for new firms to enter, thus boosting competition.
However, the latest step is the biggest one, with the energy regulator, Ofgem, referring this industry to the Competition and Markets Authority (CMA). The investigation is likely to last 18 months and will ‘leave no stone unturned in establishing the truth behind energy prices’.
One of the key things that will be investigated is the accusation of profiteering and thus whether the big six should be broken up. This would inevitably lead to reductions in entry barriers and more opportunities for new firms to enter the market, thereby creating a much needed increase in competition. The Chief Executive of Ofgem, Dermot Nolan said:
Now is the right time to refer the energy market to the CMA for the benefit of consumers…There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for.
Further comments were made about the energy sector and the future direction in terms of market reforms. This was another reason given for the referral to the CMA. Dermot Nolan added:
A CMA investigation should ensure there are no barriers to stop effective competition bearing down on prices and delivering the benefits of these changes to consumers.
The impact of this latest news will undoubtedly be felt by the big six, with share prices already taking a small hit, as investors start to look ahead to the potential outcome, despite any decision not being expected for a good 18 months. The following articles consider this latest energy market development.
Ofgem puts big six energy suppliers under CMA spotlight The Guardian, Terry Macalister (26/6/14)
Ofgem refers ‘big six’ energy groups for competition probe Financial Times, Claer Barrett (26/6/14)
U.K. energy regulator Ofgem asks for utilities probe Wall Street Journal, Selina Williams (26/6/14)
Energy probe could lead to ‘major structural change’ BBC News (26/6/14)
Probe into energy firms’ £100 per home profits The Telegraph, Emily Gosden (26/6/14)
UK competition watchdog kicks off energy suppliers probe Reuters (26/6/14)
Energy sharks may £101 profit per family: Major inquiry launched into power Mail Online, Sean Poulter (26/6/14)
Big six energy firms face full competition probe Independent, Simon Read (26/6/14)
Questions
- How well does the energy sector fit the structure of an oligopoly?
- What are the barriers to entry in the energy market? How can this referral to the CMA help to reduce them?
- Which factors determine the price of energy?
- The big six have been accused of profiteering. What is meant by this and why is it against the public interest?
- Why has it taken so long for such a referral to take place?
- In the BBC News article, the suggestion is that this investigation could lead to a ‘major structural change’. What is meant by this and why is it a possibility?
Last month the Swiss air freight company Kuehne + Nagel International AG was fined just over NZ$3m (around £1.5m) by the New Zealand Commerce Commission for their part in a price fixing cartel that ran for 5 years.
In 2002 the firms in the industry faced higher costs due to increased security measures imposed by the British government. They formed a cartel to agree to pass these increased costs on to their customers for air freight services from the UK to a number of countries, including New Zealand. The investigation by the New Zealand competition authority followed a leniency application by one of the participants in 2007. Five other participants had previously been fined, but Kuehne + Nagel decided to fight the case. The fine imposed on them brought the total fines to almost NZ$12m (around £6m).
A previous post on this site highlighted how golf played a prominent role in several previous cartels. However, this cartel seemed to have had a fixation on gardening and referred to the cartel as the gardening club. Other parties involved in the cartel were referred to as fellow gardeners and the agreed upon price as the price for asparagus! When a participant suspected a rival may have cheated on the cartel agreement email exchanges such as this one took place:
I hear… concerns about the price of produce from the garden of Velcro, which appears to be operating as a charitable cooperative for the benevolence of vegetable eaters rather than growers…
It is not known whether the Kuehne + Nagel employees involved in the cartel were placed on gardening leave during the investigation!
‘Gardening Club’ hid hardcore air freight cartel New Zealand Herald, Hamish Fletcher (04/04/14)
‘Gardening Club’ Air Freight Forwarding Cartel Finally Buried by High Court Handy Shipping Guide (08/04/14)
Swiss firm fined $3.1 million over cartel 3 News (08/04/14)
‘Gardening Club’ freight cartel participant, Kuehne + Nagel, fined $3.1m The National Business Review (08/04/14)
Questions
- Why is an increase in costs likely to trigger price fixing behaviour?
- Why might the members want to use code names to run a cartel’s activities?
- Why do competition authorities grant leniency to cartel members that inform them about price fixing behaviour?
Calls for an independent Scotland have focused on a variety of economic issues. These have included taxation, government spending, currency, fiscal policy and monetary policy. However, the BBC News article below looks at another factor which may be affected by a ‘yes’ vote – the price of stamps.
Having just returned from 10 days in the Highlands, I certainly agree with the BBC article that it would be an expensive business to deliver to the remotest parts of Scotland and would definitely require ‘trains, planes, ferries, Land Rovers and vans’ and, in an extreme case, a fishing boat.
So is the price we pay for postage to less rural areas of the UK used to subsidise the higher costs of delivery to the remotest parts of Scotland and, in particular, to the small islands off the Scottish coastline? What would a ‘yes’ vote mean for the cost of stamps in Scotland and in the remainder of the UK? The following articles consider this rather odd question.
Why postage should be cheaper in UK if Scots vote ‘Yes’ BBC News, Brian Milligan (19/4/14)
Tories warn over post service costs The Courier (6/4/14)
Questions
- What happened when the Royal Mail was privatised?
- What are the benefits and costs of privatisation?
- Using a cost and revenue diagram, explain how the different costs of delivery between urban parts of the UK and the remotest parts of Scotland should be reflected in different prices of postage.
- If the price of postage is the same for delivery everywhere in the UK, use your diagram to explain how this happens.
- What does your diagram suggest will happen to the price of postage stamps if a ‘subsidy’ is no longer available?
With the new Premier League football season only a week away, TV companies are heavily advertising the matches they will be showing. Until recently, BSkyB, having seen off competition from Setanta and ESPN, appeared to have an untouchable position in this market. However, competition now appears to be intensifying.
