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?
The retail food industry is an oligopoly – a market dominated by a few big firms, with interdependence between them. This means that each firm considers the reaction of all its competitors when making any decision. Pricing is one of those key decisions and this is one of the reasons why price wars tend to break out in this industry.
For consumers, price wars are usually seen as a good thing, as it means prices in the supermarkets get forced downwards, thus reducing the cost of living. Low prices in this case are one of the key benefits of competition. However, there are costs of such fierce competition for suppliers. 
As final prices to customers are pushed down, small competitors are likely to feel the squeeze and may be forced out of the market. The other losers are suppliers. The big supermarkets are likely to pay lower prices to their suppliers, thus adversely affecting their livelihood. Research suggests that throughout 2014, 146 food producers entered insolvency, which is significantly higher than last year.
Accountancy firm, Moore Stephens, has blamed the supermarket price war for this rise in insolvencies in the food production sector. Duncan Swift from this firm said:
“The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder…Supermarkets have engaged in questionable buying practices for years, but it’s getting worse and clearly wreaking havoc on the UK food production sector.”
The British Retail Consortium has said that placing the blame in this way was too simplistic. A commentator suggested that many suppliers have long-standing relationships with the supermarkets they deal with, suggesting that relations were good and sustainable.
Furthermore, it was suggested that the demise of these producers may be due to many other factors and the data on insolvencies did not show that those firms affected were suppliers to the supermarkets. There is a Groceries Code Adjudicator in place to ensure that the supermarkets do not abuse their power when it comes to dealing with their suppliers, but the power of this person is limited, leaving suggestions remaining that suppliers are vulnerable. The following articles consider both the good and bad of price wars.
Articles
Questions
- What are the characteristics of an oligopoly? Why do price wars tend to break out in oligopolies, such as the supermarket industry?
- Apart from the supply-chain pressure from supermarkets, what other factors could have caused so many small food producers to become insolvent?
- How does the supermarket supply chain work and why have the price wars led to suppliers being squeezed?
- Use a diagram to illustrate the impact of the price war on (a) the supermarkets and (b) the suppliers.
- How important is the Groceries Code Adjudicator and should she be doing more to protect suppliers?
- If supermarkets are cutting prices, is this an indicator of unfair competition or good competition?
The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?
Much attention has been given to the dispute centering around Amazon and its actions in the market for e-books, where it holds close to two thirds of the market share. Critics of Amazon suggest that this is just one example of Amazon using its monopoly power to exploit consumers and suppliers, including the publishers and their authors. Although Amazon is not breaking any laws, there are suggestions that its behavior is ‘brutal’ and is taking advantage of consumers, suppliers and its workforce.
But rather than criticizing the actions of a monopolist like Amazon, should we instead be praising the company and its ability to compete other firms out of the market? One of the main reasons why consumers use Amazon to buy goods is that prices are cheap. So, in this respect, perhaps Amazon is not acting against consumers’ interests, as under a monopoly we typically expect low output and high prices, relative to a model of perfect competition. The question of the methods used to keep prices so low is another matter. Two conflicting views on Amazon can be seen from Annie Lowrey and Franklin Foer, who respectively said:
“Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap. It ploughs its profits into price cuts and innovation rather than putting them in the hands of its investors. That benefits millions of families – full stop.”
“In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.”
So, with Amazon we have an interesting case of a monopolist, where many aspects of its behaviour fit exactly into the mould of the traditional monopolist. But, some of the outcomes we observe indicate a more competitive market. Paul Krugman has been relatively blunt in his opinion that Amazon’s dominance is bad for America. His comments are timely, given the recognition for Jean Tirole’s work in considering the problems faced when trying to regulate any firm that has significant market power. He has been awarded the Nobel Prize in Economics. I’ll leave you to decide where you place this company on the traditional spectrum of market structures, as you read the following articles.
Amazon: Monopoly or capitalist success story? BBC News, Kierran Petersen (14/10/14)
Why the Justice Department won’t go after Amazon, even though Paul Krugman thinks it’s hurting America Business Insider, Erin Fuchs (20/10/14)
Is Amazon a monopoly? The Week, Sergio Hernandez (19/11/14)
Big, bad Amazon The Economist (20/10/14)
Questions
- What are the typical characteristics of a monopoly? To what extent does Amazon fit into this market structure?
- Why does Paul Krugman suggest that Amazon is hurting America?
- How does Amazon’s behaviour with regard to (a) its suppliers and (b) its workers affect its profitability? Would it be able to behave in this way if it were a smaller company?
- Why is Amazon able to charge its customers such low prices? Why does it do this, given its market power?
- Is there an argument for more regulation of firms with such dominance in a market, as is the case with Amazon?
- The debate over e-books is ingoing. What is the argument for publishers to be able to set a minimum price? What is the argument against this?
- Should customers boycott Amazon in a protest over the alleged working conditions of Amazon factory employees?
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?
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.
