Will sports decide the outcome of a major ISP/content provider merger?

Last month, the battle lines were drawn at the New Zealand Commerce Commission as opponents of the proposed merger between the country’s dominant pay television operator, Sky Television, and its number-two fixed-line broadband provider, Vodafone, filed their submissions. The most prominent concern is that the merger would exacerbate Sky’s dominant position in sports content to a point where others are completely unable to compete. As the table below shows, Sky already has monopoly rights over the distribution of premium — and predominantly live — sports content in New Zealand, and critics are arguing that the merger will solidify this advantage even further. The coming response from the competition authority will be an important bellwether for content and internet service provider (ISP) mergers in countries with similar competition laws to New Zealand — including the United States. Source: Plum Consulting

Why are sports special?

Both content-distribution and network-operator rivals are of the view that premium sport content is a key input for any TV service that is to be economically viable in New Zealand. Although newly released movies and major television series are premium content, they are not in the same market as sports coverage. As observed by economic consulting firm Covec in a report supporting the submissions from network operator 2 Degrees and content provider Television New Zealand, “few viewers would consider House of Cards to be an acceptable substitute for live coverage of the Olympic games.” Indeed, Covec suggests that even within the usual sports coverage, there is a separate market for live international sports broadcasts because “immediacy is highly-valued, even when compared to short (e.g. 1 hour) delays in broadcast timing” and “an element of national identity is embodied in the sports performance and therefore also in its broadcast.” However, not all sports are created equal — Castalia reports that ISP Spark’s proprietary content network Lightbox has struggled to attract customers despite its access to English Premier League soccer, French rugby, and PGA and LPGA golf, because it “was not capable of competing with the package based around the national sports of Rugby Union, Cricket and Rugby League.”

How sports create market power

The role of sports suggests that the Sky-Vodafone merger will have “national interest” hurdles to jump in addition to the standard long-term concerns of consumers if the merger is to proceed. Of particular concern is that Sky is alleged to have already taken advantage of its dominant position to bundle multiple sports into one subscription. Combined with their staggering of start times for renegotiating the distribution rights to different live sports, this strategy has made sports fans “sticky” customers. Thus, even though it is theoretically possible for competitors to bid on the rights to individual contracts as they come up, they are unlikely to be able to outbid Sky because its larger, bundled consumer base grants it deeper pockets and hence an unfair advantage in the bidding war. When merged with Vodafone, Sky could extend that advantage even further by bundling sports content with fixed- and mobile-broadband and mobile-voice subscriptions. The more highly valued products there are in the triple- and quadruple-play bundles, the stickier consumers will be and the less competitive the broadband and voice markets will become.

Sky’s non-merger options

Opponents of the merger agree that if the merger is not allowed to proceed, the likely counterfactual is that Sky will offer its sport and other content under a wholesale arrangement for resale by ISPs under a range of triple- and quadruple-play bundles. It is even possible that Sky would increase its subscriber base by even more than is possible under the Vodafone merger if such a wholesale product was priced attractively. While Sky’s margins would be lower, opponents argue that both welfare and competition would be higher than under the merger proposal. However, Sky may already be preempting this option by separating access to premium content from the rest of its subscription bundle. Whereas a standard Sky package requires sport to be purchased as an add-on to a basic bundle of channels, Fan Pass allows non-Sky customers to buy prepaid Internet Protocol TV access to the sports channels alone for defined periods of time (e.g., a day, a week, a month, or even pay-per-view for specific events). At this point in time, Fan Pass is not restricted to consumers of any particular ISP — and it costs less for a month than the basic Sky bundle with the sports add-on. Furthermore, the arrangement could easily be extended to other premium or special-interest content — such as movies or Disney programming — should there be demand for it. Curiously, this option is not addressed in any of the submissions as a potential counterfactual – a surprising omission if sports really are the driver of pay television in New Zealand. While it is hard to read at this stage what the commission’s view on the merger might be, this case indicates that in the future, questions about access to content will likely dominate questions about access to infrastructure. In all other markets, the delivery vehicle matters less in customers’ purchase decisions than the value they place on the goods in the truck. It will be interesting to see whether the commission’s decision focuses more on the unbundling of Sky content from delivery in its own fleet of trucks or the voluntary unbundling of Sky’s take-it-or-leave-it packages under which it has historically offered its sport content.

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