UK: Why The FAPL TV Rights Decline Was Natural And Inevitable

Last Updated: 30 April 2018
Article by Stephen Hornsby

This article first appeared in World Sports Law Report.

To justify this headline claim, it is necessary to go back a bit. Prior to the creation of FAPL, football's domestic prime events were not televised much – mainly because clubs  wanted to maintain live high attendance levels and feared that live broadcasting of matches would reduce ticket sales. There was a weekly domestic league highlights package (Match of the Day) and also the FA Cup Final but not much else on a regular basis at a purely domestic level.

ITV and BBC were only two purchasers of these broadcasting rights and they did not pay a great deal of money for them. Discontent amongst football clubs was widespread; they felt that their sport was undervalued and it was muttered that television companies were  colluding  to feather their own nests. Indeed the collusion claim was actually made publicly in relation to Match of the Day, but nothing was ever proved.

As is well known, in the early 90's, Sky entered the market for a much bigger slice of live rights (still far from the entire league programme of the First Division clubs as they then were). As if by magic, fears of a decline in ticket sales evaporated in the face of an astronomic bid from the new entrant and the old buyers duopoly became a thing of the past (or so it was thought at the time and for a long time afterwards).

Having essentially "bet the farm", Sky built up a strong market position on the strength of this prime content. Competitors – like On Digital – came and went and there were many complaints to competition regulators to no avail – save that the rights were packaged up so that it was no longer "a winner take all" tender. This remedy (which annoyed many consumers who did not want to buy multiple subscriptions) was designed to allow new entrants to get a share of the pie. In the event, some did win some of the less expensive packages but Sky managed to hold onto best ones. And the broadcasting rights fees  paid to FAPL continued their apparently inexorable rise (and with them went satellite subscriptions – and less naturally and  inevitably ticket prices as well).

A few years later again, a really big new entrant (BT) came into the market. Its major concern was the potential loss of its core telephony market (now partially liberalised) to Sky. Its entry into the sports broadcasting market was therefore a defensive move primarily and precipitated by a long but ultimately unsuccessful regulatory action which it orchestrated.  Once again rights fees increased (and the rest) as BT won the rights to some significant packages. Unlike most countries in the world, the whole competition was still not televised live.

Now bringing the story up to date, we have a significant change of direction. As the most recent tender drew near, it was thought that some new entrants would come in who would bid the prices up even higher and the linear growth of rights fees would carry on apace.  In the event, however, to the surprise of many (particularly "teenage scribblers" in the City) these new entrants failed to materialise and prices actually fell for an increased number of matches. Not all the packages have been sold as we go to press but just two buyers the Sky and BT will have the pick of the crop – as was the case before FAPL came into existence.

The details are worth spelling out. A key 5 packages have been awarded with material deflation in all of them.  Sky won 4 out of the 5 packages with 2 lower quality ones remaining.  The level of deflation amounts to 9% per game. Sky's total spend fell by about 15% per annum whereas BT cut theirs by about 8%.  Sky was obviously delighted with the outcome, winning the same amount of product, if not slightly more, because more games are being televised and, interestingly, Sky and BT are now paying the same sum per game, whilst Sky retain the Sunday and Monday rights.  In contrast to the last auction where BT was perceived to be the winner, at the very least, equality has been achieved which was a key strategic priority for Sky

Why did so many commentators get this so wrong? The answer to this is really quite simple.

BT and Sky have no long term interest in outbidding each other for prime sports content

In the above summary, it was mentioned that BT came into the FAPL market for defensive reasons. It is worth emphasising what these were. Liberalisation of telecoms brought about the real possibility that BT's dominant position could be eroded by new competitors. Sky duly entered into the telephony market (landline and broadband) and regulators and others got very excited about so called "quadplay" scenario whereby industrial giants would  compete across the entire telecoms/TV rights space including mobile (into which BT and Sky might move by strategic partnership or acquisition).  All of this would benefit consumers it would seem.  Obtaining prime content was vital for BT in this scenario.

Thus if one had asked BT whether they had been interested in spending large amounts of money getting the prime sports rights market without this threat to its core business, the answer would probably have been 'No'. Football clubs naturally benefitted from this competition between these large companies but the question that should have been asked was how long this situation could last.

What happened prior to 1992 should have provided a clue and it is as follows. Markets for prime content are very expensive to enter; once the price has been bid up to a high level that deters new entry, incumbents have no commercial interest in knocking each other out of the contest.  Firstly a knock-out blow can never really be delivered as every 4 years rights go out to tender again and the loser can come back and compete against the winner who may be suffering remorse of having paid too much.  Already it was claimed by telecoms analysists that BT had paid too much and that its expansion into less compelling content such as club rugby was a mistake.  This critique seems to have been fully taken on board this time round, and BT paid a smaller amount of money for an outcome that was not materially worse for them – though it was for the clubs.

The reluctance to deliver an implausible knock out bid is intensified by the competitive relationship between BT and SKY in the quad play markets. Ultimately, of course, there is potential for wider equilibrium, whereby Sky spends less money on trying to get into telecoms significantly "in return" for BT spending less money on sports rights. At a certain point, (subject to one possible scenario that we will come onto) without any illegal communication being necessary between the two of them, their interests coincide across the whole waterfront and rights fees will decline or stagnate.  Such an outcome will obviously not be beneficial for ever hungry football clubs.  But it is a natural outcome for the reasons we have given.

Amazon, etc have no necessary interest in expensive prime sports content

Of course the big difference between now and the situation that pertained before FAPL came into being was that satellite TV did not provide any competition to ITV and BBC. The terrestrial broadcasters had no fear in that an outsider could come in and force them to pay more for the rights they were purchasing on pain of losing out.

What could have prevented the natural outcome of declining rights fees actually occurring was the existence of new bidders. This time round the so-called smart money was on Amazon and may be even Google bidding for the rights.  Naturally, this possibility was not one that the football clubs did anything to discourage and it was duly hyped by those who have their own interest in keeping clubs happy .

However the dream scenario did not come to pass and though speculation as to why the giant digital dog dogs didn't bark is always dangerous, there are actually some pretty obvious reasons why they did not enter the fray in the way that clubs hoped/expected.

The first thing that cannot be emphasised enough is that just because something can happen it does not mean to say it will. For sure, Amazon etc has the means to buy prime sports rights, but why would it pay billions to use entry to this market as a means of achieving its presumed main business objective (which is to drive users to its shopping subscription business Prime).  Whilst purchasing Top Gear was very good for its business as it brought it into new jurisdictions, the question has to be asked what extra FAPL subscribers it could have brought to Prime.  It may well have been that Amazon took the view that it was already spending quite enough or being quite successful enough in its objectives not to need to do play this expensive sports rights game.  Whisper it very quietly, perhaps it didn't even think that football was quite the compelling product that everyone assumes it to be.

Whatever Amazon actually thought, it did not bid and its market will be extended through other means in the years ahead. Subject, of course, to regulators catching up with it at last, a possibility however remote that cannot be entirely ruled out.

Gentle decline in rights fees: the shape of things to come

So what does this all mean? At a theoretical level, it shows that markets tend to work out, as they always work out; there are peaks, there are gentle declines and then there are troughs.  There is nothing inevitable about the increase in prices for products that are perceived to be desirable.  The desirability of a product waxes and wanes; just because a lot of people feel strongly that it is indispensable does not mean to say that commercial buyers parties agree.  The net outcome is that established purchasers, especially established ones in markets like prime sports content, will have an advantage over sellers and even if there is some competition, that competition is not likely to be a fight to the death or one where rights fees increase for ever and a day.  This is particularly the case here where Sky and BT the existing incumbents compete in a number of related markets and where the strategic interests probably reside in them sticking to their own patch rather than invading someone else's and getting a bloody nose.

Medium to long term, this does not look good for the football clubs. Already they are under pressure from the regulators to increase the number of matches that are televised live.  Somehow they have managed to get away with 200 matches.  This is an outcome (restriction of output) which is a classic monopolistic device for increasing prices and it is truly extraordinary that the UK is the only major jurisdiction where this is permitted.

It follows that if the clubs want to have more total revenue, they will have to increase the output. This means they will have to accept less per match as a result than they are doing now but that is probably the only way that the total revenues can be increased. Another way that overall revenue might increase is if a terrestrial only package were to be devised for some of the less interesting matches.  This would have the benefit of bringing extra sponsorship revenues as terrestrial still attracts more eyeballs and customers don't like multiple subscriptions which the competition regulators foisted on them (for no very good reason as it turned out).  These are matters for FAPL and its advisers. In the meantime this episode shows that history is not "bunk"; instead markets tend to operate cyclically and the Brave New digital world wont change this too much.

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