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Submission of Evidence to DG Competition Regarding the European Commission’s Statement of Objections over the Joint Selling of Media Rights to Premier League Matches

Submission of Evidence to DG Competition Regarding the European Commission’s Statement of Objections over the Joint Selling of Media Rights to Premier League Matches

Professor Jonathan Michie and Dr Christine Oughton

Background

The Football Governance Research Centre is a recognised research centre of Birkbeck, University of London and is the UK’s leading research centre on issues pertaining to the business, economics and governance of professional football.  In 1999 we gave evidence to the Monopolies and Mergers Commission arguing that the proposed takeover of Manchester United Plc by BSkyB would distort competition in the broadcasting industry and damage the quality of English football.  Those arguments were accepted by the MMC panel and the merger was blocked. 1

Summary

In this briefing paper we provide evidence to DG Competition regarding the Commission’s Statement of Objections.  Our evidence shows that the collective selling of broadcasting rights by the Premier League (PL) does not represent a restriction of competition on the market in the normal sense and therefore does not breach Article 81.  Our analysis, presented below, shows that the collective selling agreement improves the production and distribution of football matches and benefits consumers (football supporters).  However, we believe that these benefits would be enhanced by greater solidarity (which has been eroded in recent years) and better corporate governance of football clubs. To realise these benefits the Commission should permit collective selling but seek changes in the rules of the Premier League to: (i) increase solidarity via more redistribution; and (ii) improve corporate governance to protect shareholders and consumers (football supporters).

Finally, we argue that there is a lack of competition in the broadcasting market due to BSkyB’s dominant position and its possible abuse of that position. However, we believe that this is best dealt with under Article 82 and that the Commission should investigate BSkyB’s activities directly using Article 82 rather than seek to regulate abuse of a dominant position in broadcasting via application of Article 81 to the football industry.  The use of Article 81 to remedy BSkyB’s dominance runs the risk of undermining solidarity in the football industry and reducing the output of that industry with no guarantee that BSkyB’s dominant position and possible abuse of that position would be curtailed or eliminated.

1. The Football Industry, Joint Production and Solidarity

1.1 There are a number of important respects in which the football industry is peculiar.  These arguments are well established in the literature on professional sports leagues dating back to Neale’s seminal 1964 article on ‘The peculiar economics of professional sports’ published in the Quarterly Journal of Economics.  Since these arguments are pertinent to this case it is worth recounting them here.

1.2 First of all, the product of the football industry – entertainment value from watching football matches – is the result of joint production between the clubs and the league: it is both the outcome of production activity of the clubs and the production activity of the league.  Football clubs need to coordinate their activities to produce matches.  This coordination between clubs could take the form of a series of unrelated matches, or ‘friendly’ matches, with the clubs coordinating their activity over venues, dates and times.  However, such activity would not maximise the units of entertainment or output of the clubs as measured by attendance and viewing figures.  While friendly matches would have some entertainment value, production could be significantly increased by organising the matches as part of an interconnected series of games that make up a league championship.

1.3 It is for this reason that professional sports clubs agree to join a sports league and be regulated by that league.  The product that is created is the joint product of the member clubs and the league.  The league adds value by coordinating the matches as part of an annual championship. As a result, the output or entertainment value of each match is increased because it has meaning and significance as part of the league championship.  To see this, it is enough to consider the higher attendances and viewing figures attached to league championship matches as compared with out-of-season friendly matches; or to compare the attendances and viewing figures for matches that decide championship placings as compared to less crucial matches.  In both cases, the increased output is the result of the coordinated activity of the league.  In this respect sports leagues are not like normal cartels.  A normal cartel restricts output and does not create or add to total output.  A professional sports league creates output by coordinating the activity of the clubs as part of a league product or championship.  While it is true that the league coordinates the activities of the clubs, in doing so it adds entertainment value.  The matches it coordinates have more entertainment content and meaning as part of the league championship and they therefore attract bigger crowds and more viewers (consumers): in short, output is increased.

1.4 In addition to their coordinating role, most leagues further increase production by redistributing income.  A second peculiarity of the economics of sports leagues, is that unregulated sports leagues have an inherent tendency to instability and imbalance.  It is not difficult to see why this is the case.  In the absence of regulation, there is a tendency for the successful clubs at the top of the league to get richer while the least successful clubs at the bottom get poorer.  The more successful clubs find they have more money to spend on players, while those at the bottom have less money available for team building. Unregulated leagues thus have dynamic properties that widen the gap between the performance of clubs at the top and bottom of the league. As this happens, competitive balance – which is measured by the degree of uncertainty surrounding the outcome of matches – declines. 2  Lack of competitive balance or solidarity makes matches boring and predictable and attendance and viewing figures decline for the league as a whole.  In order to guard against this instability, which can threaten the very existence of the league, virtually all sports leagues redistribute income from the most successful to the least successful clubs. 3  Such redistribution is functional in that it enhances competitive balance and attracts more spectators and viewers.  As a result, it adds to the entertainment value of each match and increases the output of both the clubs and the league. Again, unlike standard cartel behaviour which restricts output, coordination by the league serves to increase production as measured by units of entertainment or entertainment value.

1.5 To facilitate redistribution of broadcasting revenues the Premier League, like most other sports leagues sells the broadcasting rights collectively with member clubs handing over their rights to the league.  The PL then redistributes income using the 50:25:25 rule.  As part of the redistributive mechanism, the PL also ensures that each member club has a minimum number of matches screened per season (match sharing).  In addition, the PL redistributes 5% of income to grass roots football and other parts of the game. The redistribution of this 5% of income outside the Premier League was an important aspect of the 1999 Restrictive Practices Court case brought by the Office of Fair Trading (OFT) against the Premier League.  The final judgement in that case accepted that collective selling and the associated redistribution was in the public interest.  This was the first time that the OFT had lost a case in the RPC and they did so because of their failure to understand the nature of the football industry.

1.6 The reason that the PL redistributes income within the PL and enforces match sharing stems directly from the arguments outlined above.  First, unlike a normal cartel, the Premier League is involved in the production of the output it is selling.  Second, as the coordinating body of the member clubs the PL adds value by redistributing broadcasting income and promoting competitive balance.  It has been argued – indeed, it was argued by the prosecution in the Restrictive Practices Court case – that all of the PL’s functions, including match sharing and the redistribution of income could be preserved under individual selling.  However, this is unlikely to be the case for two reasons.

1.7 First of all, there would be no mechanism requiring broadcasters to buy the rights of all clubs.  The match-sharing function provided by the PL is important in promoting and safeguarding solidarity.  Leading clubs would face strong financial incentives to sell all their matches, and the dominant broadcaster (BSkyB) would face a strong incentive to buy and screen all of those matches, substituting leading club matches, for lagging club’s matches.  By so doing, BSkyB would be likely to attract more subscribers and enhance its dominant position. Clubs at the bottom of the league would find it very hard to sell any of their rights as BSkyB targets the rights of the clubs that maximise television audiences, no longer constrained by the current requirement to provide coverage of all clubs.  The rights of the lagging clubs are unlikely to be attractive to other broadcasters seeking to challenge BSkyB’s dominance. Consumers would be faced with less choice of clubs on television and the leading clubs will increase their income and become more dominant.  Solidarity will be diminished and the competitive balance and quality of English football would decline.

1.8 Second, there is the very real prospect that the redistributive function of the league would be undermined and that it would cease to operate.  The reason is that most clubs in the PL make losses.  In the last year (2000-01) for which accounts are available for all clubs, only 7 out of 20 PL clubs made a pre-tax profit.  Thirteen clubs made pre-tax losses and one club Leicester City subsequently went into administration. In order to redistribute income the PL must first collect the money from the clubs, however, this would be a slow and protracted process and there is every likelihood that some monies would not be recovered.  In particular, where clubs go into the legal process of administration, the administrators are free under UK Company Law to renegotiate debts as a percentage of money owed.

1.9 The loss of match sharing and the very real likelihood of a breakdown in redistribution of broadcasting revenue will have the effect of reducing consumer choice, reducing competitive balance and reducing output.  At the same time there is no guarantee that competition in the broadcasting industry will increase and it may even diminish. Here, it is instructive to look at the Italian case.  Following the end of collective selling, 8 Serie A clubs found themselves without a broadcasting rights contract at the start of last season.  Supporters of those clubs had no access to live broadcasts of their teams: there was less consumer choice. There was also no agreement on redistribution. The only way the lagging clubs could negotiate sufficient redistribution was to refuse to participate in the league in order to force the leading clubs to make redistributive payments. As a consequence, the start of the season was delayed by 2 weeks and the very existence of the championship was threatened. Finally, the two pay-TV companies merged resulting in a monopoly in the pay-TV market.

2. Preserving and Enhancing Solidarity and Increasing the Output of the Football Industry

2.1 Collective selling and match sharing are necessary to facilitate redistribution.  However, over the past decade the extent of redistribution has declined and the gap between the richest and poorest clubs in the PL has increased.  The establishment of the PL ring fenced income that was previously shared and as a result an income gap has opened up between the PL and the Football League (FL).  The loss of solidarity associated with ring fencing money within the PL (as well as ring fenced income from the European Champions League for the top four PL clubs) has resulted in income gaps opening up between the top PL clubs (that regularly qualify for European competitions) and the rest of the PL and between the PL and the FL.  The widening of these gaps and the loss of solidarity has set up a financial incentive system that encourages clubs to gamble on success by overspending on players. 4

2.2 To restore solidarity there is a clear need to strengthen redistribution.  This is achieved most readily by retaining collective selling but amending the redistribution rules to ensure: (i) that there is more equal distribution within the PL; and (ii) that there is more redistribution from the PL to the FL and other parts of the game.  Such redistribution could restore competitive balance and increase the units of entertainment (output) supplied by the PL and FL.  In other words, while the PL is adding value via its redistribution rules the extent to which it is doing so is restricted and there is a need for more progressive redistribution.

2.3 An objection that is commonly raised to greater redistribution by the leading clubs is that many lagging PL clubs and FL clubs lack good financial management.  There is significant evidence for this in the financial accounts of the clubs and in our Annual Survey of Corporate Governance of Football Clubs. 5  Therefore, a necessary condition attached to the agreement over collective selling with increased solidarity (redistribution) would be the introduction of a Code of Corporate Governance for PL and FL clubs and a dedicated unit headed by a Corporate Governance Adviser to monitor compliance with the code in order enforce financial propriety and good corporate governance.  This code would promote solidarity and protect the interests of shareholders and other stakeholders, including football supporters.

2.4 One objection of the Commission is that the PL restricts output by not selling all the matches in the league.  However, the reasons for this are two-fold.  First, the PL is concerned not to reduce attendance at the grounds. It therefore ensures that any matches screened live do not take place simultaneously with non-broadcast matches that kick-off at 3.00pm on a Saturday.  The crowd is an important element of football and it too contributes to the production of the game via the creation of atmosphere. The PL’s strategy has been successful in that attendance at PL matches in close to capacity.  This can be contrasted to the situation in Italy where live matches are screened simultaneously and the average gate in Serie A is only around 60% capacity and is as low as 30-40% at some Serie A clubs.

2.5 Second, if more matches were sold, the rescheduling problems faced by clubs and particularly supporters (who are most adversely affected) would increase.  The Football Supports Federation Survey shows that most supporters do not want more matches on television and most are against further rescheduling. 6 This survey which is the biggest survey of football supporters in England is backed up by independent evidence published in the first Annual Report of the Independent Football Commission, which states that, ‘The IFC has taken note that this [rescheduling of matches] is a grievance often voiced by supporters, who see the demands of television contracts as the principal driver behind rescheduling.’ 7

2.6 To summarise, there are good reasons why the PL chooses not to sell all the matches that make up the championship that have nothing to do with restricting output and raising price. Indeed, the PL could increase its revenue from broadcasting income by selling more matches and since the marginal cost of so doing is close to zero this would increase the net revenue to the PL. The reasons that the PL chooses not to go down this road are non-financial.  First, the PL seeks to preserve attendance at the grounds as this is the very live blood of the game; and second, the PL is sensitive to the needs of its customers/stakeholders (football supporters) who by all accounts are considerably inconvenienced and aggrieved by the rescheduling of matches.

3. BSkyB’s Dominant Position and Football

3.1 There is no question that BSkyB enjoys a dominant position in the pay-TV market in Britain and that it may possibly abuse that position.  It is also the case that football is a prime source of pay-TV content.  However, it is wrong to conclude from this that the rules of the football industry (which have been developed for the good of the game) should or could be changed in order to promote competition in broadcasting in the UK.

3.2 BSkyB has been the subject of numerous investigations by the UK competition authorities but so far the corporation has managed to preserve its dominance. 8 It is important to recognise that BSkyB has responded strategically to previous attempts to change the arrangements over collective selling and is likely to do so in future.  When the OFT referred the collective selling of PL clubs’ broadcasting rights to the RPC, the strategic response of BSkyB was to attempt to take over Manchester United Plc.  The rationale was simple, if the RPC were to rule against collective selling and clubs were free to sell their rights individually, BSkyB was going to ensure that it owned the rights to the club with the biggest subscriber pulling power: Manchester United.

3.3 Thwarted in its attempt to own Manchester United plc by the MMC, BSkyB’s strategic response was to buy votes at the PL auction table by taking 9.9 per cent ownership stakes in a number of PL clubs.  Due to toehold effects 9 these stakes ensure that BSkyB has an unfair advantage in the auctioning of the rights that will ensure that BSkyB wins the rights, or that if another bidder wins, that they will be forced to bid more than the market value with the consequence that they will go out of business.  The 9.9 per cent shareholdings (which provide negative financial returns to BSkyB) have not been investigated by the competition authorities in connection with distorting competition for the PL’s broadcasting rights, but they are arguably an important mechanism via which BSkyB preserves its dominant position.  Because the shareholdings provide toehold effects they distort the bidding process in the auctioning of rights.  There is clearly a need to investigate the sources of BSkyB’s dominant position and its possible abuses of that position under Article 82.

3.4 Trying to tackle BSkyB’s dominance by prohibiting collective selling is unlikely to be successful.  The Italian case serves as a warning in this regard.  The Italian competition authorities prohibited collective selling: competition in broadcasting was one of the concerns of the authorities.  However, since that decision the number of pay-TV broadcasters has fallen from 2 to 1.  Moreover, while 3 or 4 top Serie A clubs have benefited, solidarity has been reduced and the start of the 2002/3 season was delayed by two weeks because the lagging clubs in Serie A found no market for their broadcasting rights.  Shortly after, in October 2002, Newscorp notified the Commission that it had acquired the whole of Telepiú. In April 2003 the Commission had little choice but to clear (subject to conditions, including access to content) the takeover of the Italian pay-TV company Telepiú by the Australian media group Newscorp, under the failing firm defence, thus creating a monopoly in the Italian pay-TV market.

3.5 To conclude, there is evidently a lack of competition in the UK broadcasting market due to BSkyB’s dominant position and its potential to abuse that position. However, we believe that this is best dealt with under Article 82 and that the Commission should investigate BSkyB’s activities directly using Article 82 rather than seek to regulate abuse of a dominant position via Article 81.  In particular, there is a need to look at the distortion to competition caused by toehold effects and predatory bidding. 10 The use of Article 81 to remedy BSkyB’s possible abuse of dominance runs the risk of undermining solidarity in the football industry, reducing the output of that industry with no guarantee that BSkyB’s market dominance and possible abuse of dominance would be curtailed or eliminated. In particular, the Commission should investigate the uncompetitive and predatory distortions to the auction market for the broadcasting rights associated with BSkyB’s toehold ownership stakes in PL clubs.


[1] A summary of the evidence submitted by Professor J Michie et al. is published in the Monopolies and Mergers Commission Report (1999) British Sky Broadcasting plc and Manchester United PLC: A Report on the Proposed Merger, Cm 4305, The Stationery Office. London, pp. 222-3.  We also gave evidence in person to the MMC Panel. A fuller version of our written evidence was published in Hamil, S, Michie, J and Oughton, C (eds) (1999) A Game of Two Halves? The Business of Football, Edinburgh: Mainstream (see chapter by Michie and Oughton).  In addition, a research paper published by us in 1999 before the outcome of the Restrictive Practices Court case over the collective selling of television rights by the Premier League set out a number of arguments to show that this collective selling operated in the public interest.  Many of the arguments were accepted in the ongoing court case and the UK Restrictive Practices Court ruled that collective selling was not a restriction on competition operating against the public interest.  See Findlay, J, Holahan, W and Oughton, C Revenue Sharing from Broadcasting Rights, in Hamil, S, Michie, J and Oughton, C (eds) (1999) ibid.

[2] In a league with perfect competitive balance the expected probability of any team winning any match would be 0.5 for all matches.

[3] The existence and stability of the league can be threatened by bankruptcy of clubs, breakaway leagues and/or loss of attendance.

[4] Leeds United, a quoted company, took this gamble in the 2001-2002 season, investing heavily in players in the hope of getting into the European Champions League.  Failure to do so pushed the club into financial crisis, its share price plummeted and the club had to sell its most valuable players.

[5] See Hamil, S, Michie, J, Oughton, C and Shailer, L (2001) The State of the Game: The Corporate Governance of Football Clubs 2001, FGRC Research Paper No 2, 2001, Birkbeck, University of London, and Hamil, S et al (2002) The State of the Game: The Corporate Governance of Football Clubs 2002, FGRC Research Paper No 1, 2002, Birkbeck, University of London.

[6] See The Football Supporters Federation (2003) FSF News, May 2003, FSF, London, p. 4.

[7] The Independent Football Commission (2002) IFC Annual Report: Executive Summary 2002, The IFC, Middlesborough.

[8] The latest (OFT, 2002, No CA98/20/2002 Case CP 01916-00) concluded that BSkyB was operating on the borders of anti-competitive behaviour.  The Director General of Fair Trading stated that ‘On the key issue of the alleged margin squeeze against rivals we found BSkyB to be around the borderline of anti-competitive behaviour.’ (OFT Press Release, PN89/02, 17th December 2002).  However, that investigation was narrowly focused on the wholesale market and did not look at the auction process.

[9] The toehold effect refers to an anti-competitive effect caused by the bidder in an auction owning a part of the item s/he is bidding for.  The ‘toehold’ or ownership means that the bidder can bid £X more than the market value knowing that £X will be returned to them on completion of the sale.  This distorts competition because the other bidders know they will have to bid X above the market value to secure the auction.  As a result there is every chance other bidders will not bid, or if they do, that they will pay too much and be forced out of business.

[10] Predatory bidding is analogous to predatory pricing.  Under predatory bidding, the bidder bids more than the common value for the rights (and in the case of sealed bids, signals that it can do so, by for example, taking ownership stakes) with the intention of deterring other bidders or forcing other bidders to suffer the winners’ curse (as was the case with ITV Digital and NTL in the last UK football rights auction) in order to drive them out of the market or even out of business.  Such behaviour is not part of fair competition, as the clear intention is to deter competitors from bidding or to force them to overbid in order to drive them out of business. Once competitors have been eliminated the dominant firm is free to bid less. Ownership stakes and toeholds (see footnote 9) facilitate predatory bidding by reducing the net cost of a bid and by signalling to other potential bidders that a bidder is able to bid more than the common value.  This was an important reason underlying the decision of the MMC to recommend the blocking of BSkyB’s attempted takeover of Manchester United.  However, merger law does not permit investigation of small (10%) shareholdings even though the toehold effect can work with small shareholdings.  This anti-competitive effect would therefore need to be investigated under Article 82.

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