BAGS v AMRAC Exclusionary entry, sponsored entry and entry assistance: are they legitimate concepts in antitrust? Dr Bill Bishop ACE Conference, Berlin, 27 November 2009
The Industry 60 racetracks BAGS, SIS, AMRAC, non-uk sales On-track bookies 9,500 betting shops Maybe 2,000,000 punters Circa 1,000 on-track bookies Maybe 500,000 racegoers 1
The Background Bookies created the TV-feeds-to-betting-shops service 25 years ago SIS prospered and discovered an unexpected economy of scope: its fleet of trucks-with-uplink-dish took over outside broadcasting for TV Racetrack owners (mainly theme park owners and English aristocrats) were angrily dissatisfied with the amount BAGS/SIS paid them for their TV rights 2
The Controversy AMRAC, created and endowed by 19 sponsoring racetrack owners (incl. Ascot) with exclusive rights to 31 racetracks, entered in 2007-08 Big bookies (BAGS), horrified, invoked competition law and said: You should have entered less savagely You sewed up too many rights Hence yours was exclusionary entry You should have signed up only the minimum you needed for viable entry Then we (and possible third parties) could have competed for the rest AMRAC et al. in reply said: Wrong! BAGS (monopsonist) should have to give up exclusivity But we should be allowed to use it Because, as entrants, we merit entry assistance As Shakespeare said A plague on both your houses I contend that sponsored entry is natural and benign but that neither entry assistance nor exclusionary entry has any place in competition law 3
Overview of SIS The third party: Satellite Information Services Ltd ( SIS ) SIS shareholders include several bookmakers SIS acquires picture, data and audio rights from greyhound and horse racecourses to show in LBOs ( LBO media rights ) SIS provides live horseracing TV pictures and sound commentary to LBOs In addition, SIS supplies a processed racing text service, raw racing data and associated equipment (e.g. terminals) to LBOs Until the launch of AMRAC s service, SIS was the only distributor of live horseracing images to LBOs (on a pay basis) in the UK From April 2007 to December 2007, SIS provided live TV pictures and sound commentary from 53 of the 59 British racecourses From January 2008, it has provided coverage from 28 racecourses 4
BAGS/SIS exclusive agreements AMRAC s counterclaim focused on the exclusive BAGS/SIS licensing agreements for LBO media rights AMRAC s counterclaim also initially included other exclusive agreements involving SIS but these claims were later dropped Racecourses (60) Content producers/ media rights owners Arena Leisure (7) Northern Racing (9) ICAC (8) Jockey Club (13) Content/media rights intermediaries BAGS (8) Sedgefield Towcester, Ripon, Newton Abbot, Plumpton, Great Leighs independent racecourses (17) Ascot Horseracing broadcasters/ channels SIS SIS FACTS AMRAC Turf TV 5 Licensed betting offices (LBOs) Source: Oxera Ladbrokes, William Hill, Coral, Betfred,Tote, and others
AMRAC counterclaim and SIS defence AMRAC s main claims SIS main defence 1. The BAGS/SIS exclusive agreements have anticompetitive effects 2. The BAGS/SIS exclusive agreements were not necessary for SIS to remain in the market 3. The BAGS/SIS exclusive agreements should be set aside while AMRAC s exclusive agreements should be allowed 1. The BAGS/SIS exclusive agreements do not generate any anticompetitive effects Even if they did, the procompetitive effects of the BAGS/SIS exclusive agreements outweigh any anticompetitive effects 2. Whether the BAGS/SIS exclusive agreements were necessary is irrelevant 3. No regulation (let alone asymmetric regulation) is justified 6
Exclusive media rights Exclusive licensing of media rights: Provides rights holders with an efficient tool to maximise the value of their rights (especially with more than one distributor) Provides TV distributors with the ability and incentive to invest in the development of the service Both these goals are efficient and welfare-enhancing in the long run (provided that downstream competition is not stifled) Because of this, exclusive licensing of media rights is: Very widespread in the sports industry Widely accepted by regulators (especially when it arises as a result of effective ex ante competition for media rights) 7
The effects of exclusivity downstream TV distribution is characterised by: High fixed costs of acquiring content rights Low marginal costs of service provision If content rights were available non-exclusively to all distributors: Intense downstream competition would push subscription prices down to marginal cost of service provision (i.e. very close to 0) Distributors would not make any profit (let alone extract the full economic value of the rights) Therefore, absent exclusive content: Distributors would be unlikely to invest in distributing content The product would not exist (or exist only in inferior form) Temporary exclusive content allows distributors to charge a price reflective of the full economic value of the rights 8
The effects of exclusivity upstream Exclusivity allows distributors to: Charge higher prices downstream Generate higher rents downstream However, distributors rarely appropriate these rents as rights holders typically extract a large portion of them Competition between distributors to acquire exclusive content rights drives up the price of the rights and the rents flowing to rights holders Maximising rents flowing to rights holders is normal and legitimate Akin to extracting full economic value from IP rights covered by a patent Exclusivity in sport typically results in: Larger investments, more prize money, better talent Improved quality and value of the sport to the benefit of consumers 9
Ex ante competition for media rights In industries with high fixed costs / low marginal costs (e.g. TV distribution), competition takes the form of: periodic rival competition for acquisition of rights periodic rival entry in acquisition of rights Nature of real competition in TV distribution is ex ante competition for exclusive media rights In this case, effective ex ante competition between BAGS, SIS and AMRAC for Northern and Arena s LBO media rights Nothing anti-competitive about exclusive BAGS/SIS and AMRAC agreements Exclusivity is natural in industries like this Exclusivity is essential to the efficient operation of such industries 10
No excessive exclusivity in this case Exclusive agreements can have anticompetitive effects if their length or breadth is excessive Excessive exclusivity can allow a distributor to become entrenched and foreclose the downstream distribution market to actual or potential rivals However, the BAGS/SIS exclusive agreements cannot result in anticompetitive retrenchment of SIS position Duration of contracts is only five years; and Contracts cover less than half of available British horseracing content BAGS/SIS exclusive agreements have not prevented AMRAC s entry and operation upstream or downstream AMRAC s exclusive agreements have not excluded BAGS/SIS from the market 11
No consumer harm in this case Any potential higher prices to LBOs do not automatically result in harm to consumers of TV horseracing images (i.e. punters) Prices to consumers in the off-course betting market are largely set by emerging odds in the on-course betting market The latter are unaffected by the price of TV horseracing images to LBOs Therefore, higher prices to LBOs are unlikely to result in higher prices to consumers Potential negative effects on consumers if an increase in prices to LBOs drives some LBOs out of business, but: No evidence this effect is large Any negative effects should be assessed against benefits to all consumers from better racing experience resulting from higher income to racecourses 12
Necessity of BAGS/SIS exclusive agreements AMRAC question: Were the BAGS/SIS exclusive agreements necessary for SIS to remain viable in the market following AMRAC s entry? This question is not the correct test Incorrect to presume that an exclusive agreement is a restriction of competition that can be exempted only if it is indispensable To allow AMRAC to enter the market; or To allow SIS to remain in the market It is reasonable to conclude that without the BAGS/SIS exclusive agreements the market might have tipped to AMRAC Key point: provided they do not restrict competition firms should be left to pursue their best interests without regulation 13
No intervention justified AMRAC asked the court to set aside the BAGS/SIS exclusive agreements while allowing AMRAC s exclusive agreements No economic argument for such asymmetry No economic justification for such re-engineering of market outcome If Northern and Arena LBO media rights were compelled to be sold non-exclusively, this would: Prevent Northern and Arena from realising the full value of their rights To the detriment of the horseracing industry and consumers Regulatory intervention would involve setting prices and terms of non-exclusive licensing (or sub-licensing) agreements Difficult exercise requiring ongoing monitoring Better for no intervention as none is justified 14
Simply a commercial dispute The horseracing industry has been characterised by a long-term struggle for rents between racecourses and bookmakers These legal proceedings were just one more round in this struggle for rents Racecourses captured a larger share of industry rents via AMRAC s entry This was a commercial dispute which did not appreciably affect consumers (i.e. punters) Even if some off-course punters were worse off, this was outweighed by all other punters being better off Real nature of competition in this market is ex ante competition for exclusive media rights BAGS and AMRAC using competition law to try to extract from the court an artificial commercial advantage over the other 15
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