Sports Media Rights and Multichannel Video Programming: A Review

Transcription

1 AAI Working Paper No aai ABSTRACT: Regional Sports Networks, Competition, and the Consumer Author: Diana L. Moss, Vice-President and Senior Research Fellow, American This paper examines competitive issues surrounding sports media rights and multichannel video programming distribution (MVPD) markets. Cable and satellite providers often have significant interests in the Regional Sports Networks (RSNs) that jointly coordinate and market the media rights for regional or local sports teams in various U.S. markets. But these markets have a number of features that should factor importantly into competition analysis. For example, there is often limited competition in sports media rights and MVPD markets. Ongoing changes in programming content and packaging, and the bundling of sports and non-sports programming also means that market definition is an important issue. Finally, unique consumer preferences for quality and consistency in sports programming should be considered. The paper argues that changes in the structure of RSN and MVPD markets and non-merger agreements should be closely scrutinized by antitrust and regulatory agencies. This includes mergers at the horizontal MVPD and RSN levels and those that create vertically-integrated content/distribution platforms. Such scrutiny should pay close attention the systems competition issues raised by the two dominant modes of MVPD--cable and satellite. Both antitrust and regulatory agencies should make full use of remedial conditions in dealing with problematic mergers and the Federal Communications Commission should pursue directives geared toward promoting and maintaining competition in the carriage of sports-related programming. Date: May 2006 Keywords: antitrust, concentration, economic analysis, enforcement agencies, market definition, market power, merger, regulation, sports JEL Classifications: D2 Production and Organizations D4 Market Structure and Pricing K2 Regulation and Business Law L1 Market Structure, Firm Strategy, and Market Performance L2 Firm Objectives, Organization, and Behavior L4 Antitrust Policy L8 Industry Studies: Services 1

2 Author Contact: Diana Moss AAI working papers are works in progress that will eventually be revised and published elsewhere. They do not necessarily represent the position of the American Antitrust Institute. 2

3 Regional Sports Networks, Competition, and the Consumer INTRODUCTION Diana Moss 1 In an economy increasingly characterized by complex business relationships, Regional Sports Networks (RSNs) are no novelty. There are now over 30 such entities in the U.S. The New England Sports Network (NESN)--a joint venture between the Boston Bruins and Red Sox--is 20 years old. Also consider the numerous regional Comcast SportsNet (CSN) and Fox Sports Net (FSN) networks and the controversial Mid-Atlantic Sports Network (MASN). 2 The prominent role of media in sports makes RSNs high stakes ventures, which likely accounts for the ownership interests of multi-channel video programming distributors (MVPDs) such as cable and Direct Broadcast Satellite (DBS) providers. 3 Comcast, for example, has aggressively pursued the formation of RSNs around the 1 Vice President and Senior Research Fellow, American (AAI). AAI is an independent, non-profit education, research, and advocacy organization that favors the use of antitrust in promoting competition policy and market performance. The website address is Many thanks to those that provided comments on earlier drafts: Steve Ross, Roger Noll, Don Resnikoff, and Albert Foer. 2 See, e.g., Washington Times. April 23, Baseball, TV and the Antitrust Exemption, Washington Time; Bruce Fein, August 22, 2005, Taking the Stand: Baseball s Privileged Antitrust Exemption, LegalTimes.com. Available and Tim Lemke. April 7, Comcast, MASN Negotiate, The Washington Times. 3 RSNs can be hugely profitable with margins estimated at percent. See, e.g., Frank Ahrens. September 30, Area Baseball Network Must Form Quickly, Washingtonpost.com. Not all RSNs are success stories, as demonstrated by the Minnesota Twins involvement with the Midwest Sports Channel. 3

4 country, recently capturing a 30 percent ownership interest in SportsNet Chicago. 4 MVPD involvement in RSNs is also motivated by competitive reasons. For example, News Corporation--parent of the FSN West RSN--purchased Major League Baseball s (MLB s) Los Angeles Dodgers in 1998 with the alleged purpose of discouraging Disney (who then owned ESPN and MLB s Anaheim Angels) from launching its own RSN. 5 Vertical relationships involving sports-related MVP link up the media rights holders (i.e., the local teams) with the RSN, which typically purchases the exclusive rights to show the events. The RSN then coordinates and jointly markets the programming to MVPDs who offer it, in turn, to subscribers in the form of sports channels and other premium sports packages. These relationships can range from ownership through merger or acquisition (M&A), to contractual agreements with exclusive terms and conditions, to simple buyer-seller relationships. In an industry where there is limited competition at most levels, ongoing changes in control that create or enforce vertically-integrated content/distribution platforms should trigger a rigorous level of scrutiny by antitrust and regulatory agencies. This paper argues for such an approach, while noting several additional factors specific to sports that can potentially complicate antitrust analysis. These include the significance of market definition and consumer preferences for quality and consistency in sports-related MVP. The paper also notes that while there are no antitrust exemptions involving professional 4 See R. Thomas Umstead. October 4, Comcast Grows Sports Empire, Multichannel News. But as many MVPDs are expanding their positions, some firms have divested themselves of ownership interests in sports teams and RSNs. 5 News Corporation and Disney eventually sold the Dodgers and Angels, respectively. 4

5 league sports and MVPDs, other sports-related immunities might be argued to apply to RSNs. Fact situations in regional U.S. markets can vary substantially, so there are no simple answers to the foregoing questions. But it is possible to evaluate the basic competitive and consumer issues in order to frame out the major questions they raise for competition policy. MARKETS FOR SPORTS-RELATED MVP There are a number of possible scenarios involving markets for local sports programming. Two are most likely to be encountered. One scenario is a single RSN in the upstream media rights market and competing cable and/or satellite providers in the downstream MVPD market (Figure 1). A second scenario involves multiple upstream RSNs and competing downstream MVPDs (Figure 2). Figure 1: Single RSN and Competing MVP Distributors Team Team Team Media Rights Market MVPD Market Regional Sports Network Cable Direct Broadcast Satellite Subscriber Subscriber Subscriber Subscriber 5

6 Figure 2: Competing RSNs and MVP Distributors with Integrated RSN and Cable Firm Team Team Team Media Rights Market MVPD Market Regional Sports Network Regional Sports Network Cable Cable Direct Broadcast Satellite Subscriber Subscriber Subscriber Subscriber Figures 1 and 2 indicate the relationship between individual teams and the RSN. Comcast s SportsNet Chicago, for example, handles programming for the White Sox and Cubs (MLB baseball), Bulls (NBA basketball), Blackhawks (NHL hockey), and Fire (MLS soccer). Denver s Altitude Sports and Entertainment network covers the Avalanche (NHL hockey), the Rapids (MLS soccer), and Mammoth (NLL lacrosse). The multiple RSNs shown in Figure 2 might offer programming for different combinations of teams or sports in the same geographic area. 6 For example, the Yankees Entertainment and Sports (YES) Network was formed in 2002 to cover MLB s Yankees and the even newer SportsNet New York (SNY) launched in early 2006 carries the rival MLB Mets both New York teams. Table 1 lists a number of similar instances. For 6 Some RSNs also cover local collegiate and minor league teams. 6

7 example, of the RSNs located in the 19 major regional markets in the U.S., eight markets contain more than one RSN. New York hosts four RSNs while Chicago, Florida, the South, New England, the West, the Mid-Atlantic, and the Rockies have two RSNs. The remaining 11 markets have single RSNs. Table 1: Regional Sports Networks in the U.S. Region/RSN Altitude CSN Cox FSN MASN MSG NESN SNY Sun YESN Rocky Mtns. Chicago Mid-Atlantic Baltimore Southwest West Bay Area Detroit Midwest New England New York North N. Wisconsin Northwest Ohio Pittsburgh South SouthEast Florida **Shaded cells indicate multiple RSNs in a given area. Note that the Entertainment and Sports Programming Network (ESPN) is a national sports network and is not included in the table. Key to Acronyms: Altitude = Altitude Sports and Entertainment, CSN = Comcast SportsNet, Cox = Cox Sports, FSN = Fox Sports Net, MASN = Mid-Atlantic Sports Network, MSG = Madison Square Garden Network, NESN = New England Sports Network, SNY = SportsNet New York, Sun = Sun Sports, YESN = Yankees Entertainment and Sports Network. The two dominant modes of MVP distribution cable and DBS--are also shown in Figures 1 and 2. Here, it is important to note that cable penetration rates have declined over time falling from about 68 percent in 1999 to about 60 percent in mid Most of this share was given up to DBS. In the one-year period between 2004 and 2005, for 7

8 example, DBS subscribership increased by almost 13 percent. In 2005, DBS accounted for about 28 percent of all U.S. MVP subscriptions. 7 POTENTIAL COMPETITIVE ISSUES RSNs themselves and mergers or other non-ownership agreements between RSNs and MVPDs can fundamentally alter the incentives and abilities of market participants to affect prices and output. These issues fall into the two broad categories discussed below: (1) horizontal integration or agreements and (2) vertical integration or agreements. 8 HORIZONTAL ISSUES One question is whether the aggregation, coordination, and joint marketing function performed by RSNs (as shown in either Figure 1 or 2) eliminates competition in the media rights market. If it does, then the RSN could restrict output and raise prices to MVPDs for the relevant programming. The answer depends heavily on whether individual team programming competes for the viewership of local fans or whether the RSN performs a valuable economic integration function for a series of individual team monopolies, each with no good substitutes. Mergers of MVPDs and RSNs also have horizontal effects. In Figure 2, for example, the merger of two RSNs could produce a more powerful entity with a greater 7 Federal Communications Commission. March 3, Annual Assessment of the Status of Competition n the Market for the Delivery of Video Programming, 12 th Annual Report, p. 14 and 37. Available 8 The competitive effects of these forms of consolidation or agreements on competition and consumers are evaluated under both the no-harm (to competition) standard employed by the antitrust agencies under Section 7 of the Clayton Act (as amended, 15 U.S.C. 18), Section 5 of the Federal Trade Commission Act (as amended, 15 U.S.C. 45), and the broader public interest standard applied by the FCC in exercising its statutory authority under the Communications Act (410 U.S.C. 310(d)). 8

9 ability to demand placement on downstream MVPD s standard tier and a per customer charge that would be passed on to subscribers. The rumored combination of the YES Network and NESN in 2004 could potentially have raised this issue. 9 Likewise, a merger of unintegrated local cable providers might enhance buyer market power, resulting in more favorable prices and terms for RSN programming. VERTICAL ISSUES Vertical integration of RSNs and MVPDs poses the classic double-edged sword for competition and consumers. One benefit is that integration can lower transactions costs for the merged firm. These include costs associated with: (1) the elimination of price negotiations for certain services, (2) investment in equipment that can be used in joint production, and (3) avoidance of haggling between stakeholders about how to divide the proceeds of sports media productions. At the same time, consolidation that creates a vertically-integrated content/distribution platform or exclusive agreements (that effectively accomplish integration) between RSNs and MVPDs can have potentially anticompetitive effects. 10 These result from strategies designed to foreclose rivals from markets or conduct that 9 See, e.g., CNN Money. August 3, Report Says Baseball s Fiercest Rivals are in Talks to Combine Team-Owned Regional Sports Networks, CNN Money. 10 The United Kingdom Monopolies and Mergers Commission s 1999 blocked the take-over of the Manchester United football (soccer) club by Rupert Murdoch s BSkyB--the monopoly supplier of premium sports programming. See, e.g., Martin Cave and Robert W. Crandall. February Sports Rights and the Broadcast Industry, The Economic Journal 111, F4-F26. 9

10 would otherwise raise rivals costs, allowing the merged entity to leverage its market power to other levels. 11 Consider a merger or exclusive agreement between an RSN and cable provider in Figure 1. Such a combination potentially creates the ability and incentive for the firm to adversely affect market outcomes by frustrating access by the rival DBS supplier to RSN programming. Ability comes from the merged company s control of RSN programming and incentive turns on whether denying or frustrating access is a profitable strategy. For example, the merged firm must off-set the lost programming revenue (from denying the rival DBS provider access) with a revenue gain from sales at supra-competitive prices. Typically, this cost/benefit analysis depends on the market share of the merged firm. In Figure 2, a merger or exclusive agreement between an RSN and DBS supplier poses the additional possibility that the merged entity could foreclose the rival RSN from carriage on its MVP system. Consider now a merger of the two cable providers (one with an existing interest in an RSN) in Figure 2. Such a combination might increase the firm s incentive to adversely affect market outcomes. With a greater share of the downstream MVPD market, the merged company might find it profitable to foreclose the rival DBS supplier from RSN programming. Likewise, the merger of the two competing RSNs (one with an existing interest in a MVPD) could increase the ability of the merged entity to adversely affect 11 See, e.g., Michael H. Riordan and Steven C. Salop Evaluating Vertical Mergers: A Post- Chicago Approach, 63 Antitrust L.J. 513 and David Waterman, , Vertical Integration and Program Access in the Cable Television Industry, 47 Fed. Comm. L.J. 511, pp

11 market outcomes. With a control over all RSN programming in the market, foreclosure is more viable. The exclusionary conduct embodied in foreclosure is problematic because it narrows the field of options for rivals in their respective markets. Depending on the type of foreclosure, such diminished competition can increase the prices at which RSN programming is sold to MVPDs and/or those charged to subscribers of MVP services. These issues have arisen in a number of cases, including the Federal Communication Commission s (FCC s) decision in Fox s proposed acquisition of DirecTV 12 and the Federal Trade Commission s (FTC s) investigation into Comcast and Time Warner Cable s proposed acquisition of the cable assets of Adelphia. 13 IMPORTANT FACTORS IN EVALUATING COMPETITIVE ISSUES Competition analysis under both antitrust and regulatory standards typically looks at a number of factors: market definition and structure (i.e., market shares and concentration), potential adverse competitive effects, the role of entry, and merger-related efficiencies. Two of these factors are likely to stand out in assessing competitive 12 See Federal Communications Commission. January 14, Memorandum Opinion and Order, General Motors Corp. and Hughes Electronics Corp., Tranferors and New Corporation Ltd., Transferee. Available 13 See Antitrust Law Blog: FCC Antitrust Highlights. August 7, Available See David Lieberman. July 24, FCC Asked to Put Limits on Deal for Adelphia, US Today; Federal Trade Commission. January 31, FTC s Competition Bureau Closes Investigation into Comcast, Time Warner Cable and Adelphia Communications Transactions. Available See also statement of Chairman Majoras, Commissioner Kovacic, and Commissioner Rosch and partial dissenting statements of Commissioners Liebowitz and Harbour. The FTC concluded that geographic clustering in this case warranted no remedial conditions on the basis that the transactions and consolidation were not likely to substantially lessen competition. 11

12 outcomes in sports-related MVP--market definition in upstream media rights and downstream MVPD markets and the role of consumer-related efficiencies. MARKET DEFINITION Market definition is the first step in most antitrust analysis. A relevant market for antitrust purposes is the smallest group of products (in a geographic area) that consumers could switch to in order to avoid a price increase by a hypothetical monopolist. Market definition therefore asks what products consumers view as good substitutes. If consumers can switch to other available products, then it would be harder for any single seller or group of sellers to profitably increase prices. In upstream media rights markets, for example, the question is how MPVDs are likely to view programming for different local teams marketed by an RSN. Is programming for local baseball, for example, a good substitute for local hockey? Is programming for one local baseball team a viable substitute for a rival local baseball team? If the answer to the first of the foregoing questions is no, then the media rights for each team are effectively individual monopolies and joint marketing would not eliminate competition. 14 Alternatively, if programming for individual teams offered by an RSN does compete for the viewership of local fans, joint marketing through an RSN could incrementally increase market power and result in higher programming prices or lower output. 14 Most RSNs provide coverage of local or sports teams within or near a major metropolitan with strong fan loyalty and support. A local MPVD would be unlikely to consider sports-related MVP offered by non-local RSNs a good substitute. 12

13 A number of antitrust cases have found that the most important sports constitute separate markets. 15 Under such circumstances, an RSN such as SportsNet Chicago may not raise competitive concerns, whereas the MASN--which jointly markets the rights of two competing MLB teams (the Baltimore Orioles and Washington Nationals) may be problematic. In downstream markets, antitrust analysis asks how MVP subscribers view various products offered through different MVPDs. For example, do consumers consider different RSN channels and packages sold by local cable and satellite providers to be effective substitutes? This may be the case in the larger metropolitan areas that host the multiple RSNs shown in Table 1. And in what instances do sports channels compete with other forms of non-sports premium programming? In downstream markets, the FTC has made both of the foregoing determinations i.e., that premium sports channels are a market or that premium pay television programming comprises the relevant market. 16 Thus, in some cases, the elimination of multiple sports channels offered through different RSNs such as FSN and CSN could pose competitive problems while under a broader market definition (e.g., pay programming), it would not. 15 See, e.g., USFL v. NFL 842 F.2d 1335 (1988). For more detailed discussion, see e.g., Franklin M. Fisher, Christopher Maxwell, and Evan Sue Schouten Sports League Issues: The Relocation of the Los Angeles Rams to St. Louis, in Antitrust Revolution, Kwoka and White eds., 4 th edition, Oxford. 16 European competition authorities have made similar findings. See, e.g., Office of Fair Trading The Director General s Review of BSkyB s Position in the Wholesale Pay TV Market. Cited in Cave and Crandall, op. cit., p. F23. 13

14 Market definition is--and will continue to be--a difficult and controversial component of competitive analysis involving sports-related MVP. Not only are there different markets for different purposes but markets are changing over time. Larger numbers of channels (often with ongoing changes in programming) are offered in basic packages and sports- and non-sports programming is bundled together. CONSUMER ISSUES Analysis of competitive issues involving sports-related MVP must also consider effects that--while unrelated to competitive concerns--could countervail or militate against them. In some cases, for example, MVP subscribers may place a higher value on convenience and quality than they would on price. This characteristic of consumer demand creates tensions for the desirability of certain market structures that would be achieved through mergers or other agreements involving RSNs and MVPDs. For example, fans might willingly pay a monopoly price to avoid the service interruptions that could occur because of disruptive bargaining between rival RSNs or between multiple RSNs and MVPDs. 17 Thus, arrangements or outcomes that place all local sports programming with a single RSN might be preferable. On the other hand, more powerful MVPDs that result from consolidation may renew or intensify the bargaining over the share of profits that are divided between the various stakeholders. This increases the likelihood of service disruptions that inconveniences fans and viewing 17 Due to asymmetries (i.e., imbalances) in information between buyers and sellers, establishing prices for programming is costly and bargaining can be a disruptive process. See, for example, the outcome of negotiations between the Yankees Entertainment and Sports Network and Cablevision in NYC. 14

15 audiences. Finally, multiple offerings between rival RSNs, each with exclusive agreements with cable and DBS providers, could force consumers to (1) invest in different or additional equipment and (2) pay for bundled packages that include redundant sports programming. 18 The weight given to the foregoing considerations in antitrust analysis will depend largely on the magnitude of potential competitive harm raised by various transactions. More competition in popular sports channels and packages offered through RSNs is very much in the interest of MVPDs who given strong viewership for the team-specific programming that is offered by different RSNs would find ready customers. Moreover, promoting competition at both the RSN and MVPD levels is likely to ensure that prices are low, and that consumers are afforded choice in sports-related programming. ANTITRUST ISSUES RELATING TO PROFESSIONAL LEAGUE SPORTS There are no specific antitrust exemptions involving professional league sports and MVPDs. Nonetheless, another source of controversy in the RSN debate may be whether favorable antitrust treatment afforded league sports in certain contexts should apply to RSNs. 19 For example, professional baseball has the benefit of a court-created exemption which extends to franchise relocations and other conduct that is the business 18 At the same time, mergers or exclusive agreements could also harm consumers by forcing them to purchase multiple and/or incompatible hardware. 19 See, e.g., Stephen F. Ross Monopoly Sports Leagues, 73 Minn. L. Rev Ross argues that the single-entity argument is flawed as a matter of economics because club-run leagues do not have a unity of economic purpose and lack a residual claimant to organize the league and distribute the proceeds. See also, e.g., Bengt Holmstrom. Autumn Moral Hazard in Teams, The Bell Journal of Economics, 13(2), pp and Michael A. Flynn and Richard J. Gilbert. February The Analysis of Professional Sports Leagues as Joint Ventures, The Economic Journal 111, p. F27. 15

16 of baseball. 20 Arguments that the provisions of Sports Broadcasting Act (SBA) of 1961 may exempt RSNs may also surface in the debate. The SBA exempts from antitrust scrutiny any league that sells or transfers all or part of the (broadcast) rights of the league's member clubs. 21 While the applicability of the baseball exemption outside the player market is still unresolved by the courts, it is likely that the exemption would not easily be extended to the joint marketing activities of RSNs. Several attempts to apply the baseball exemption to media have failed. 22 The exemption does not cover arrangements that are designed to protect or increase the profits of a particular team owner and when the controlling entity (the RSN) is not a baseball team engaged in the business of baseball. 23 Arguably, the joint marketing of rights through RSNs is no more the business of baseball than is running a parking lot adjacent to the stadium. The broadcast exemption is also not easily extended to RSNs. Here again, several attempts to expand coverage of the SBA to MVPD have failed. 24 The SBA deals with 20 Federal Baseball Club vs. National League 259 U.S. 200 (1922). See also Toolson v. New York Yankees, Inc. 346 U.S. 917 (1953) and Flood V. Kuhn 407 U.S. 258 (1972) U.S.C See, e.g., Henderson Broadcasting Corp. v. Houston Sports Association, Inc., 659 F. Supp. 109 (1987) U.S. Dist. Here, a district court held that an exclusive agreement between the Houston Astros and a radio station was not exempt because the competition affected was with a rival broadcaster, not a participant in the baseball industry. 23 See Stephen F. Ross. May 28, The Baseball Antitrust Exemption Lives, But with Criticism, in the Eleventh Circuit. Amicus Brief filed by the American. Available 24 In Shaw v. Dallas Cowboys Football Club, Ltd. (172 F.3d 299 (3d Cir. 1999), the Third Circuit Court of Appeals held that the statute did not protect the NFL's sale of games for satellite programming packages. 16

17 collective sales of rights or joint contracting by a league, not to sales of individual rights by local team owners or to the resale of rights by a rights purchaser (e.g., an RSN). Moreover, major federal cases have construed the applicability of the SBA to sponsored telecasting to apply narrowly to over-the-air television broadcasting. This means it would not affect negotiations with cable or satellite providers by entities controlling the media rights. IMPLICATIONS FOR ANTITRUST AND REGULATION The foregoing analysis of competitive issues in sports programming markets highlights two major policy issues. First, MVPD markets have benefited by continued penetration of DBS. Cable mergers that increase incentives to foreclose rival MVPDs from affiliated RSN programming could quickly reverse those gains. Competition will therefore benefit from continued close monitoring and scrutiny of cable consolidation. In problematic cases, divestiture can reduce cable market power. And regulatory policy initiatives and directives that promote the continued penetration of DBS and compel carriage of independent programming should be promoted. Second, the lack of close substitutes created by fan loyalty to particular local teams can have significant implications for competition in MVPD markets. This unique feature of demand for sports programming will affect whether joint marketing of rights through RSNs creates competitive problems. It also will affect outcomes of vertical relationships between MPVDs and RSNs. Exclusive agreements that foreclose competing MVPDs from access to RSN programming could impose significant switching or 17

18 duplication costs on consumers who are forced to invest in multiple services to get the programming they want. The foregoing issue highlights the growing dichotomy between cable-based and DBS-based MVPD systems. In this case, maintenance of systems competition is heavily dependent on robust upstream media rights and downstream MVPD markets and open and unfettered MVPD access to local sports programming. Exclusive agreements or mergers that limit MVPD access to programming undercuts the benefits of growing, head-to-head competition between cable and DBS. Vertical relationships therefore require careful monitoring and (when necessary) remedial conditions such as open access to programming or divestiture See, e.g., Thomas A. Piraino, Jr A Proposal for the Antitrust Regulation of Professional Sports, 79 B. U. L. Rev. 889, pp