In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. Sky, who have an estimated 85% share of the market were investigated by Ofcom and a decision has now been made. Sky will be forced to reduce the price it charges to other Broadcasters for showing premium sport channels. The wholesale price of Sky Sports 1 and 2 (two of my favourite channels!!) will each be reduced by just over 23% to £10.63 a month each. The idea is that this decision will benefit consumers by increasing choice. However, Sky argues that it will be to the ‘detriment of consumers’ as incentives to invest and take risks will be blunted.
Furthermore, there are also concerns that it will mean less money going into sport. Rugby, football, tennis etc benefit from some very lucrative TV rights deals and if Sky is forced to reduce prices (it is appealing the decision), then the value of these deals is likely to decline, which may lead to less investment in grass-routes participation.
Whilst progress has been made within this area, critics argue that Ofcom have not gone far enough and should have extended their decision to more sport channels (not just Sky Sports 1 and 2) and even to the premium movie channels. This would again increase consumer choice and provide more people with access to premium TV. This would work alongside more innovation within the pay-TV industry, which has seen Sky being given permission to offer pay-TV services on freeview, which will open up pay-TV to millions more consumers. Whilst no action has been taken regarding Sky’s dominance of premium movie channels, this issue has been referred to the Competition Commission. Is Sky’s dominance over sporting events about to come to an end?
Articles
BSkyB ordered to cut sports channels rates Reuters, Kate Holton (31/3/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
Consumers are big winners in BSkyB ruling Financial Times, Ben Fenton and Andrew Parker (31/3/10)
BSkyB should shake hands and move on Financial Times (31/3/10)
Sky told to cut wholesale prices by regulator Ofcom BBC News (31/3/10)
Ofcom v Sky BBC News blogs: Peston’s Picks, Robert Peston (31/3/10)
BSkyB ‘restricting competition’ BBC Today Programme (31/3/10)
Ofcom orders Sky Sports price cut Guardian, Mark Sweney (31/3/10)
Sky ruling: Culture Secretary challenges Tories to back Ofcom Guardian, Mark Sweney (31/3/10)
Sky forced to cut the price for top sports events: Q and A Telegraph, Rupert Neate (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Regulator sets the fuse for shake-up of pay-TV Independent, Nick Clark (31/3/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Pay TV Statement Overview (31/3/10)
Pay TV Statement Summary (pdf file) (31/3/10)
Pay TV Statement Full document (pdf file) (31/3/10)
Questions
- To what extent will Ofcom’s decision to force Sky to reduce prices lead to an increase in consumer choice? Why is consumer choice good?
- Why has Sky been able to charge such high prices in the past, in particular for sports channels?
- According to the BBC News article, Sky shares were the biggest risers on the FTSE by midday on the day of the announcement. Why do you think this was the case?
- Would a similar decision on premium movie channels significantly increase consumer choice?
- Into which market structure does the Premium TV industry best fit? Consider the characteristics of the pay-TV industry. Into which market structure does it best fit?
- Why may Ofcom’s decision lead to less investment in sport at the grass roots?
Ofcom, the communications regulator, is keen to encourage the spread of super-fast broadband through investment in fibre-optic cabling. So far, super-fast broadband is available to around 46 per cent of the UK population. Both Virgin Media (formerly Telewest and NTL) and BT have invested in fibre optic cables, but Ofcom is keen to extend the use to rival companies.
It proposes two methods: the first is to give competitors access to BT’s cables; the second is to allow competitors to install their own cables using BT’s ducts and telegraph poles. In both cases BT would charge companies to use its infrastructure and would be free to set prices so as to ensure a ‘fair rate of return’.
The articles below consider this ‘solution’ and its likely success in developing competition in the super-fast broadband market through competition, or whether BT’s and Virgin’s market dominance will continue to the detriment of consumers. You can also find links below to the Ofcom report and summaries
Articles
BT welcomes Ofcom’s fibre access plans Reuters, Kate Holton (23/3/10)
Ofcom to encourage super-fast broadband Business Financial Newswire (23/3/10)
Ofcom tells BT to open its fibre network ShareCast (23/3/10)
Ofcom wants BT to open up infrastructure Financial Times, Philip Stafford (23/3/10)
Ofcom push to give broadband rivals access to BT tunnels Financial Times, Tim Bradshaw and Andrew Parker (23/3/10)
BT UK Pushes Ofcom to Open Virgin Medias Broadband Cable Ducts SamKnows, Phil Thompson (23/3/10)
BT welcomes Ofcom’s fibre access plans ISPreview, MarkJ (8/3/10)
Report and summaries
Summary: Enabling a super-fast broadband Britain Ofcom (23/3/10)
Review of the wholesale local access market: full document Ofcom (23/3/10)
Review of the wholesale local access market: summary Ofcom (23/3/10)
Questions
- What forms does competition take in the broadband market?
- What are the barriers to entry to the super-fast broadband market?
- Are fibre-optic networks a natural monopoly? Explain the significance of your answer for competition in the super-fast broadband market.
- Will Ofcom’s desire for BT to get a fair return on its wholesale pricing of access to its cabling, ducts and telegraph poles be sufficient to ensure effective competition and that profits are not excessive?
- Explain whether it would be in consumers’ interests for competitors to be given access to Virgin’s cables and ducts.
The European Commission has received three complaints against Google for anti-competitive practices. The complainants are Microsoft’s Ciao, UK price comparison site Foundem and French legal search engine ejustice.fr
“The Commission has not opened a formal investigation for the time being. As is usual when the Commission receives complaints, it informed Google earlier this month and asked the company to comment on the allegations. The Commission closely cooperates with the national competition authorities. No further information can be given at this stage.”
Although the complaints are different (see articles below), the common feature is that Google has used its dominant market position to the detriment of competitors and consumers. Not surprisingly, Google has vigorously defended itself against the accusations.
So just what is the case against Google? Are the complaints justified, or are they merely competitors whinging about their relative lack of success? The following articles look at the facts and the issues.
EU launches antitrust inquiry into Google ‘dominance’ Times Online, Mike Harvey (24/2/10)
Google Says It Faces Competition Complaints in Europe BusinessWeek, Brian Womack and Joseph Galante (24/2/10)
Google faces anti-monopoly probe by European Commission Guardian, Andrew Clark (24/2/10)
Why Europe could prove Google’s undoing Guardian, Bobbie Johnson (24/2/10)
Analysis: not evil? Are you sure? Times Online, Mike Harvey (24/2/10)
Google faces Brussels antitrust scrutiny Financial Times, Richard Waters and Nikki Tait (24/2/10)
EU Opens Antitrust Investigation Into Google. Microsoft’s Fingerprints Are Everywhere. Washington Post, MG Siegler (23/2/10)
Google Hit With Antitrust Probe in Europe PC World, James Niccolai (23/2/10)
Is Redmond The Puppet Master In Google EU Anti-Trust Investigation? search engine land, Greg Sterling (23/2/10)
Google Under Investigation by European Union PCMag, Mark Hachman (24/2/10)
EU inquiry points the searchlight on Google’s methods Telegraph, Kamal Ahmed (24/2/10)
Google under investigation for alleged breach of EU competition rules Telegraph, Kamal Ahmed (24/2/10)
Questions
- What is the case against Google? Does this make it in breach of EU competition law?
- Assess Google’s response.
- Is Google “doing anything to choke off competition or hurt our users and partners”?
- How could competition be increased for Google? Is this likely to happen?
Kraft was seeking to take over Cadbury since September 2009, (see Cadbury: Chocolate all change and A Krafty approach to Cadbury). But the Cadbury board had rejected previous bids as being too low. The September bid, for example, was valued at £10.2bn. On 19 January 2010, however, after heated negotiations the board accepted the latest offer by Kraft valued at £11.5bn ($19bn).
But is the deal good news? Or will what is sweet for senior management and the financial institutions which brokered the deal be dark bitter news for the main stakeholders – consumers, workers and shareholders? The following articles explore the issues.
Cadbury battle ends with midnight handshake Financial Times, Lina Saigol (19/1/10)
Cadbury takeover: a crafty bit of business or an overpriced confection? Telegraph, Jonathan Sibun (20/1/10)
Cadbury’s sweet City deal leaves a bitter taste in Bournville Guardian, Heather Stewart and Nick Mathiason (19/1/10)
Thousands of Cadbury jobs under threat as Kraft swallows a British icon (including video) Times Online, Helen Nugent and Catherine Boyle (20/1/10)
Cadbury deal ‘the price of globalisation’ Financial Times, Jenny Wiggins and Jonathan Guthrie (19/1/10)
Cadbury sale ‘right thing to do’ FT video (19/1/10)
Bitterness as Kraft wins Cadbury Independent, Nick Clark (20/1/10)
The winners: Management duo in line for bumper pay packet from takeover deal Independent, Nick Clark (20/1/10)
Kraft came hunting in the only country that would sell – Britain Independent, James Moore (20/1/10)
Kraft’s takeover leaves a bitter taste in the mouth Telegraph, Tracy Corrigan (19/1/10)
A sweet deal – or a takeover that is hard to swallow? Independent, Hamish McRae (20/1/10)
Cadbury: banks are the real winners BBC News blogs: Peston’s Picks, Robert Peston (20/1/10)
Warren Buffett blasts Kraft’s takeover of Cadbury Guardian, Graeme Wearden (20/1/10)
Cadbury says job cuts inevitable after Kraft takeover (including videos) BBC News (19/1/10)
Cadbury and the open market theory: they’d better be right Guardian blog, Michael White (20/1/10)
The Business: Bonus season and the Cadbury takeover Guardian podcast, Aditya Chakrabortty
How did Quakers conquer the British sweet shop? BBC News Magazine, Peter Jackson (20/1/10)
Why Kraft must keep organic cacao farmers sweet Guardian blog, Craig Sams (20/1/10)
Questions
- What were the incentives for the Cadbury board to accept the proposed offer by Kraft?
- Do such incentives lead to the efficient operation of markets?
- Explain what is meant by ‘competition for corporate control’. To what extent is such competition in the interests of consumers?
- What economies or diseconomies of scale are likely to result from the takeover? What will determine the extent to which changes in costs are passed on to the consumer?
- How will the following stakeholders fare from the takeover, both in the short run and in the long run: (a) consumers; (b) workers; (c) shareholders?
- Examine Warren Buffet’s arguments for rejecting the deal.
With banks around the world revealing massive profits and huge bonuses, governments are getting increasingly uneasy that their bailouts have lined the pockets of bank executives. Not surprisingly voters are demanding that bankers should not be rewarded for their reckless behaviour. After all, it was taxpayers’ money that prevented many banks going bankrupt during the credit crunch.
Banks, of course, seek to justify the bonuses. If you don’t pay large bonuses, they maintain, then senior staff will leave and profits will suffer. It’s nothing to do with ‘morality’, they claim. It’s the market. ‘If you don’t pay the market rate, then executives will leave and take higher-paid jobs elsewhere.’
So are governments calling this bluff? In his pre-Budget report in December, the UK’s Chancellor of the Exchequer, Alistair Darling, announced a 50% tax on bank bonuses over £25,000. This was followed by an announcement by Nicholas Sarkozy that the French government would impose a similar 50% tax on bonuses over €27,500.
Then in mid January, President Obama proposed a tax on financial institutions with balance sheets above $50 billion. This would be levied at a rate of 0.15 percent of certain assets. But this was not a tax on bank bonuses, as favoured by the British and French governments, nor a tax on financial transactions – a type of Tobin tax – as favoured by Angela Merkel (see Tobin or not Tobin: the tax proposal that keeps reappearing). Nevertheless, it was another way of recouping for the taxpayer some of the money used to rescue banks and prevent a banking collapse.
So is this payback time for bankers, or will it simply be bank shareholders that suffer? And why can banks pay such large bonuses in the face of so much public hostility? The following articles explore the issues.
To leave or not to leave: the supertax question Financial Times, Patrick Jenkins and Kate Burgess (9/1/10)
French tax to raise €360m Financial Times, Scheherazade Daneshkhu and Ben Hall (13/1/10)
Oversized bank bonuses: classic case of overcharging The Business Times (Singapore), Anthony Rowley (15/1/10)
Obama vows to recoup ‘every dime’ taxpayers lent banks Belfast Telegraph (15/1/10)
Obama outlines $117bn bank levy (including video) BBC News (14/1/10)
Obama lays out his proposal to tax big US banks Sydney Morning Herald, Jackie Calmes (16/1/10)
Obama’s bank tax will only work if there’s a master plan in place Telegraph, Tracy Corrigan (14/1/10)
Turning the tables The Economist (14/1/10)
Obama’s bigger rod for banks BBC News, Peston’s Picks, Robert Peston (14/1/10)
Will Obama’s tax go global? BBC News, Peston’s Picks, Robert Peston (15/1/10)
Darling: I won’t do an Obama and tax the banks Scotsman, Eddie Barnes (16/1/10)
Obama tax is only the beginning of the banking Blitz Telegraph, Edmund Conway (15/1/10)
Bank taxes edge closer to the real target Guardian, Dan Roberts (15/1/10)
Questions
- Compare the incentive effects on bankers of the British, French and US measures discussed in the articles.
- Why does the ‘market’ result in high bank bonuses? Where does economic power lie in the market?
- Assume that you hold shares in Bank A. Would you welcome (a) high bonuses for executives of Bank A; (b) a tax on bank bonuses; (c) a ceiling on bank bonuses; (d) a tax on certain bank assets? Explain.
- What insights can game theory provide for the likely success in clawing back bank bonuses without doing damage to the economy?
- Consider whether Obama’s tax will “go global”.