The Economics of Television Sports Rights
Europe and the US – A Comparative Analysis
- Side: 57-80
- Publisert på Idunn: 2018-12-16
- Publisert: 2002-10-01
- Creative Commons (CC BY-NC 4.0)
This article analyses the market for TV sports rights in Europe compared with the US TV markets. It reveals that the most expensive soccer rights have become even more expensive than the NFL rights, which are the most costly US sports rights. The most attractive European products (the soccer rights) have been acquired by pay-TV. This is different from the US, where free-to-air advertising channels still dominate. European sports rights remain considerably cheaper when acquired exclusively by free-to-air channels. One reason for this is the regulation of European broadcasting. Public service broadcasters are not allowed to construct a menu of programmes that is based on purely commercial considerations, and some of them are not permitted to sell advertising at all. In addition, advertising on TV in general is still heavily regulated in Europe. These regulations reduce the channels' financial capabilities, and thus also their bids for sports rights. The profitability of sports rights deals is extremely vulnerable to negative changes in demand because of the high degree of sunk costs. Thus the history of TV sports rights in Europe and the US also includes a number of unprofitable deals.
The most expensive sports rights have reached levels that seemed unimaginable only a few years ago. While the 1948 Summer Olympics in London were sold for a fee of £1, 500,1The Economist (1996): «Swifter, higher, stronger, dearer», 20 July 1996. the 2000 Sydney Olympic games brought in more than $1.3 billion.2Kagan World Media Ltd. (2001): Kagan European Sports, May 2001.
The current agreement between the National Football League and US television, valued at $17.6 billion, is the most expensive deal ever in the history of sports rights. In Europe, the prices of soccer rights in particular have increased dramatically during the last decade.3Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London. A number of commercial TV channels have acquired broadcasting rights to attractive sports in order to strengthen their market position. Nevertheless, the history also contains quite a number of unprofitable deals.
Recent analyses have focused on various aspects of this development (Solberg 2002; Cave & Crandall 2000; Gaustad 2000; Solberg and Gratton 2000; Szymanski 2000; Boardman & Hargreaves-Heap 1999; Quirk and Fort 1999; Cowie and Williams 1997). This article will consider to what degree the European markets have adopted the North American model. It concentrates particularly on the period after the deregulation of European broadcasting in the mid-1980s.
The reason for this comparison is the long history of commercial broadcasting in the US. Three issues will be in focus here: price developments, the profitability of the deals and how rights have been distributed among the various categories of channels.
Since these issues are not independent of one another, analysing them separately is of limited value. Likewise, they are all influenced by a number of different factors, making it difficult to analyse the issues thoroughly on the basis of a single theoretical perspective. Thus, this article will combine relevant elements from market and welfare economic theory as well as elements from relationship marketing theory.
Section two presents the objectives of the TV channels involved in sports broadcasting and provides a survey of important market conditions such as regulation policy. Furthermore, relevant elements from relationship marketing theory will be introduced. Section three foregrounds sports right fees and the question of profitability. It then describes how sports rights have been distributed among the channels. In section four, these facts will be discussed on the basis of the aforementioned theoretical perspectives.
Some Economic Characteristics of TV Broadcasting
With its high degree of fixed costs and relatively low degree of variable costs, TV broadcasting is a typical «economies of scale» production. The production and transmission of TV programmes requires considerable initial funding. Once the initial costs have been recovered, those that can afford the entrance costs will enjoy economies of scale and scope by being able to spread overhead costs, apply common managerial techniques, spread risks, and enjoy pecuniary advantages such as discounts from programme suppliers (Dunnett 1990). The same applies to the broadcasting of sporting events, especially if the fees are high and fixed.
The broadcasting of TV programmes also contains some elements of public goods – both in the production and in the transmission process. The reception of a television signal by one viewer within a broadcasting market does not prevent it from being received by another viewer. The cost of a TV programme is unaffected by the number of viewers watching. To the broadcaster, the marginal cost of transmitting a programme to one additional viewer within any broadcasting market area is literally zero. This corresponds to the nonrivalling criterion characteristic of public goods (Olsson 1971). However, as the production of programmes has the characteristics of private goods, the situation is different there.
The production of TV programmes incurs high «first copy» costs (Brown and Cave 1992). Once the expenses have been met and the programmes produced, however, the cost to the original producer is independent of the number of channels acquiring the rights of rebroadcast. There may even be cost sharing if other channels purchase the same programme.
The TV Channel Landscape
Figure 1 gives an overview of the current actors involved in trading sports rights and of the distribution of rights, as well as the financial sources of the TV channels. This manner of categorisation pertains to the European situation, while Figure 2 surveys the TV landscape in the US.
The US broadcasting networks reach almost 100 per cent of all TV households. To achieve such a high penetration rate, however, the networks depend on being connected to several hundred local affiliates. These affiliates receive cash compensation for carrying the scheduled national programming that is provided by the networks free of charge (Dunnett 1990). Second in line in terms of penetration level are the cable networks, of which the largest reaches more than 80 per cent of all TV households. Satellite channels have a considerably lower penetration rate.
Public service broadcasting channels (hereinafter called PSB channels) represent the main difference between the two continents. PSB channels continue to have a strong position in Europe, even though their market position is considerably weaker now compared to a few years ago. Non-commercial PSB channels are funded entirely by licence fees or public grants, while the commercial PSB channels are allowed advertising. Some channels combine these two sources of income.
The majority of PSB channels have a penetration rate of almost 100 per cent of the TV households in their countries. To achieve this level of penetration, however, the channels are obliged to provide a programme menu with objectives beyond the mere entertainment of viewers and the profitability of private broadcasting firms. In welfare economics terms, the overriding objective of PSB channels has been to maximise the welfare of the society, subject to financial constraints determined by political authorities. This also encompasses a philosophy of programme production and presentation, which includes concerns for national identity and community, catering for all interests and tastes (including minorities), quality of programming, and a «local content» provision which specifies certain levels of domestic production as well as certain programme categories (Brown 1996).
Heavy restrictions limit the PSB channels’ scope for carrying advertising. Moreover, apart from the general licence fee, they are not allowed to charge viewers. It is argued that charging for television programmes introduces welfare economic inefficiency, which is characteristic of public goods. Potential viewers are deterred from watching the programmes, although the resource cost of their viewing would remain zero. Even PSB channels undoubtedly value high rating figures, this motive, however, is more a matter of prestige than a welfare economic rationale. One reason for this might be that low rating figures potentially threaten the channel’s legitimacy, licence fee and ultimately, the jobs involved.
Certainly, the broadcasting authorities' requirements to the PSB channels vary across Europe. Both obligations and advertising regulations vary from one country to another. For the purpose of this analysis, however, it is not deemed necessary to examine these variations in detail. The main point is that the regulations reduce the financial strength of the PSB channels and hence their ability to compete for expensive sports rights. In-house produced programmes are generally more expensive than purchased programmes. Channels obliged to cater for minority groups could alternatively have obtained higher advertising revenues by using the same resources to broadcast programmes for a mass audience (see below). In the US, on the other hand, PSB channels occupy only a marginal position, and they have thus not been involved in sports broadcasting.
Advertising channels broadcast programmes that are free to watch, i.e. the viewer pays by watching commercials. Advertisers seek to change the demand curve for their product and/or make it more inelastic, permitting an increase in price. Advertisers will continue to supply advertising up to the point where the marginal cost of advertising equals the marginal revenue from advertising (Kaldor 1950). Naturally, advertisers aim at maximising the number of potential customers, and consequently, their willingness to pay will broadly be proportional to the size of the audience.
Advertising channels have traditionally been the dominant force in US broadcasting. In Europe, on the other hand, a large number of independent national as well as multinational advertising channels have emerged since the liberalisation of the airwaves in the mid-1980s. The majority of the national channels achieve a penetration rate of 50 to 80 per cent of the households in their home countries.
Despite the liberalisation of European broadcasting since the mid-1980s, TV advertising remains quite regulated. This is illustrated in Table 1, which indicates the maximum limits of advertising in the so-called big-five soccer nations. In addition, Europe also has other regulations, such as a ban on alcohol and tobacco advertising. In Scandinavia, there is a ban on TV advertising in connection with children’s programmes. Such regulations are not found in the US except when airing programmes that target children, where the regulations are similar to the general regulations in Europe.
|US:||No federal law limits the amount of commercial matter that may be broadcast at any given time. The exception is television programmes aimed at children 12 years and below, where advertising may not exceed 10. 5 minutes per hour on weekends and 12 minutes per hour on weekdays.|
|UK:||The BBC is not allowed to air advertising. Channel 4 and ITV are limited to 7. 5 minutes per hour, while BSkyB is limited to 9 minutes per hour.|
|Germany:||Public service channels are limited to 20 minutes per day, while private channels are limited to 12 minutes of advertising per hour.|
|Italy:||The public service channel, RAI, is restricted to 7. 2 minutes per hour (a daily average of 2. 4 minutes per hour). Private national channels are limited to 10. 8 minutes per hour (a daily average of 9 minutes per hour). Private local channels are limited to 12 minutes per hour.|
|France:||Private TV channels are limited to 12 minutes per hour (a daily average of 6 minutes per hour), while Canal Plus is limited to 9 minutes per hour (a daily average of 6 minutes per hour).|
|Spain:||Private TV channels are limited to 12 minutes per hour, while Canal Plus is restricted to 2. 3 minutes per hour.|
Pay service channels may take account of the intensity of viewers’ preferences expressed in monetary terms, which is different from advertiser-supported broadcasting. In so doing, subscriber-supported broadcasting has the potential to generate the production and transmission of programmes that advertising channels would deem unprofitable. The income stems from the consumer surplus the viewers would have obtained had the programmes been broadcast for free on air. Hence, it is possible for programmes that attract a moderate number of viewers to be profitable, provided that the channel finds a way of charging those viewers. Subscription fees and pay-per-view fees are the main sources of revenue. Indeed, pay service channels also carry advertising, but that accounts for a considerably smaller proportion of the overall revenue than what is the case on pure advertising channels. The penetration level of these channels is considerably lower than the free-to-air channels. So far, the majority of pay service channels have offered quite a narrow menu of programmes, chiefly consisting of sports programmes and popular films.
Buyer – Seller Relations
Deciding whom to sell to may not be simply choosing the highest bid. The relationship among the actors involved in the trade may be just as important as the bids themselves. Of course, this includes the relationship between the seller and the potential buyers. Indirectly, however, this also includes the relations between the TV channels and their viewers and advertisers. In the end, they are the ones financing the deals.
Wilson (1995) introduces a model for analysing the relationship between sellers and buyers. The model contains thirteen variables that influence the various stages of a relationship, from the initial partner selection to the maintenance of the relationship. These four variables are of particular importance to the distribution of TV-sports rights:
Mutual goals concern the degree to which partners share goals achievable only through joint action and through the maintenance of the relationship. Mutual goals are essential when a deal is made, as well as when the relationship continues. Sports-rights holders prefer selling to channels with a high degree of correspondence with their own goals. In particular, this especially applies to sports federations that also use sporting events as sports promotion in order to stimulate recruitment. In other words, the overall media exposure may be just as important as the value of the TV rights themselves.
Adaptation occurs when one party in a relationship alters the processes or the item exchanged in order to accommodate the other party (Håkansson 1982; Han & Wilson 1993). The concept of structural bonds is a vector of forces that create impediments to the termination of the relationship. The robustness of the structural bonds is strongly influenced by the trading partners’ ability to adapt the product. The more influence the buyer has on the product, the more likely it is that the buyer will maintain the relationship with the seller. The fact that a large proportion of the costs related to the broadcasting of TV sports are sunk costs makes the structural bonds extremely important to the TV channels. Strong structural bonds between the channels and their advertisers reduce the risk when entering into long-term deals. Similar interdependence can be found between pay service channels and their viewers.
Commitment implies the importance of the relationship to the partners and their desire to continue the relationship. It is an important variable in discriminating between «stayers and leavers» (Mummalaneni 1987), and a critical variable in measuring the future of a relationship. Commitment assumes that the relationship will induce future value or benefits to its partners (Hardwick and Ford 1986). For instance, the pay service channel subscribers are more likely to continue subscribing if they believe that the channel will continue offering the same menu of programmes. This also applies to advertisers who are satisfied with the exposure they have received from previous involvement with a sport or a channel.
Prices, Profitability and the Distribution of Rights
Price Development5All figures in the tables are in nominal values.
Price escalation of sports rights started in the US in the early 1970s, while the European fees were quite moderate until the 1990S. As seen in Table 2, the Summer Olympics are still considerably more expensive in the US than in Europe. It is important to bear in mind the differences in population size. In 1999, the US population reached 276 million, while the European population was 690 million. Thus, the nominal price gap per viewer is even larger than what is revealed by the figures themselves.
The relative price gaps, however, have narrowed considerably in recent years. In the 1980s and 1990s, the European Summer Olympic prices averaged approximately ten per cent of the US prices, while the proportion increased to 50 per cent for the years 1996–2008. The gap is even wider for the Winter Olympics, with the 2000–2008 European prices only equivalent to 20 per cent of the US level. The US deals also include profit sharing clauses, which means that the prices increase when the advertising revenues surpass the financial break even point. Thus, the value of the deals after 2000 might exceed the figures in the tables.
It is worth keeping in mind that the European prices in this decade could have been 40 per cent higher. When the IOC sold the complete 2000–2008 rights to the EBU for $1.4 billion, they rejected a bid of $2 billion from News Corporation. This decision will be discussed below.
Soccer has long been the dominant TV sport in Europe in terms of both rating figures and rights fees [Table 3]. In 1998, soccer matches topped the ranking lists in 75 per cent of 50 countries. Eighty-six and 73 of the top 100 programmes in Germany and France, respectively, were soccer-related.6Kagan Sports Newsletter 2000. Six of the top ten TV programmes in the UK were soccer matches in the World Cup finals.7Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London.
The escalation of prices for soccer rights gained momentum in the early 1990s. However, as Table 4 reveals, this increase did not correspond with developments in the rest of the economy. It is worth noting that the value of the Italian soccer rights increased by 152 per cent during a period when the Gross Domestic Product decreased by four per cent.
Rubert Murdoch-owned BSkyB acquired the domestic rights for live matches from the English Premier League (EPL) for the first time ever in 1992 and has kept them since. The price was three times the value of the existing deal held by ITV. However, while the former deal included 18 live matches per year, BSkyB increased this to 60. Hence, in 1992 the price per match hardly increased. The annual value of the EPL quadrupled in 1997, then tripled in 2001, and on these occasions the price per match increased substantially. The current domestic EPL deals, which also include ITV highlight programmes, bring in more than $640 million annually.9Kagan Media Ltd.: European Sport, Nov. 2001.
This development is similar to what took place in other European countries. In the 1987/88 season, the German premier league (Bundesliga) brought in $10.8 million in TV rights fees.10Baskerville Communication Corporations (1997): Global TV-Sports Rights. This had increased to $341 million by the 2001/ 02 season.11Sport Business News 2001. In the 1999/00 season the Italian premier league (Serie A) clubs got $451 million from their sale of TV rights.12Kagan Media Ltd.: European Sport, May 2001.
Team sports also attract large TV audiences in the United States. American football – represented by the National Football League (NFL) – is definitely the number one sport. Nine of the all-time top ten programmes are Super Bowl finals, which attract more than 130 million domestic TV viewers. The 1982 Super Bowl final achieved a rating of 49. 1 per cent of all US TV households, and it continues to hold the rating record. Major League Baseball (MLB) and the National Basketball Association (NBA) have competed for the number two status, while the National Hockey League (NHL) has been ranked as number four among the professional leagues. This is confirmed in Table 5, which shows the TV rights for the four major professional leagues.13Not including Canada.
|Period||Annual fees ($ 1,000)|
|National Football League|
|1998 – 2005||2,200,000|
|1994 – 1997||1,097,000|
|1990 ߝ 1993||900, 000|
|1987 – 1989||468, 000|
|1982 – 1986||378, 000|
|National Basketball Association|
|1998 – 2002||660, 000|
|1994 – 1998||276, 000|
|1990 – 1994||219, 000|
|1986 – 1990||63, 000|
|1983 – 1986||22, 000|
|Major League Baseball|
|2001 – 2006||570, 000|
|1996 – 2000||340, 000|
|1990 – 1993||352, 000|
|National Hockey League|
|1999 – 2005||120, 000|
|1994 – 1999||43, 000|
Although prices have increased enormously, there have also been periods of slower growth, such as the early 1990s. However, as the table only includes deals between national channels and the leagues, it does not tell the entire story. MLB, the NBA and the NHL have obtained considerable revenue by selling broadcasts to local TV stations.
While the Olympic games are still the most expensive in the US, the picture is different for the most valuable team sports. This is indicated in Table 6, which shows the prices per capita for the NFL and EPL15All calculations are based on the 1999 populations, which were 276. 2 million in the US and 58.7 million in the UK. (domestic rights only), the single most expensive sports rights on the two continents.
The current EPL deal is the more expensive of the two when the figures have been adjusted for differences in population. The EPL rights escalated by more than 3, 000 per cent from 1990 to 2002, while the NFL rights increased by 145 per cent.
|National Football League||3.3||4. 0||8. 0||8. 0|
|English Premier League||0. 4||1. 1||4. 1||11. 0|
The Commercial Value of Sports Rights
The profitability of sports rights agreements is another factor to be considered. The two leading European pay service channels, BSkyB and Canal Plus, have both increased their number of subscribers and turned a profit from sports broadcasting. BSkyB’s most valuable asset has been the domestic rights to the English Premier League; this channel surpassed 6 million subscribers in 2002. The French channel Canal Plus has become the largest European pay service channel in terms of subscribers. Unlike BSkyB, Canal Plus has expanded its activities across a number of European countries.
Indeed, there have even been a number of unsuccessful sports rights acquisitions. The collapse of the deal between the Nationwide League and ITV-Digital in 2002 is well known. In Germany, Kirch Media hit financial trouble partly due to its overestimation of the value of the German Bundesliga. Consequently, the deal for 2001 to 2004 has recently been renegotiated at a substantially lower rate. Another German channel, RTL, reported considerable losses from their Champions League deal in the late 1990s.17Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London. The Italian pay service channels sharing the broadcasting rights to Serie A (Telepiu and Stream) have recently been unable to make a profit from their deals. Moreover, their financial problems have been passed on to the clubs. In the Netherlands, Sport 7 obtained the rights to the Dutch premier league in 1996 at a record fee, only to go bankrupt after a few months.18Baskerville Communication Corporations (1997): Global TV-Sports Rights. In addition, several European channels lost substantial amounts of money from acquiring the 2002 World Cup soccer rights, e.g. the Italian channel RAI and the French channel TF1.
Successes and failures in the game of sports rights are also found in the US. The rights for the Olympics have generally been profitable deals, especially when the games have been hosted on the American continent. Fox rose to become the fourth largest broadcasting network in 1994 after acquiring the NFL rights for the first time. The ESPN channels have become the largest cable network – mainly thanks to attractive sports programmes. CBS, on the other hand, almost went bankrupt in the early 1990s after having overestimated the value of MLB (Quirk and Fort 1999). Several channels were forced to take substantial write-downs on unprofitable sports deals in the US markets in the 2001/02 season.19Sport Business News.com.
The Issue of Distribution
Until the late 1980s, sports programmes in Europe had mainly been broadcast on PSB channels. Major international events such as the Olympics or the World Cup finals were acquired by the European Broadcasting Union (EBU),20EBU represents 65 member broadcasting organisations in 49 countries, mainly across Europe, but also in the Middle East and North Africa. and subsequently distributed to their member channels at prices based on full cost coverage. Recently, this pattern has changed dramatically as the commercial channels have taken over a large slice of the market. Pay service channels have been especially successful in acquiring domestic soccer league rights. With a few exceptions, live matches from the domestic premier leagues are now only screened on pay service channels, while PSB channels have found themselves limited to highlight programmes.
Pay service channels have had mixed success in acquiring international events. As mentioned above, News Corporation failed to acquire the rights to the Olympics, despite a 40 per cent higher bid than that of the EBU. However, Prisma, a member of the Kirch family, was more successful and secured the rights to World Cup soccer in 2002 and 2006 from the EBU. Therefore, the 2002 tournament was partly broadcast on pay service channels in Europe, at prices that were drastically higher than the 1998 tournament.
Pay service channels have acquired the rights to other sports as well, but not with the same level of success for the sellers. For instance, BSkyB’s acquisition of the Rugby League rights for £87 million in the mid-1990s was extremely valuable to a sport that was second on the ranking list. The disadvantage was that the average viewership declined from 2. 63 million when the BBC broadcast the games – to 67 000 after BSkyB acquired the rights. The average rating dropped from 4.9 to 0.4. Because of this steep decline, BSkyB renegotiated the contract and reduced its investment to £44 million. When the games were returned to the BBC in 1999, even fewer people were watching (O’Keffe 2002). In Norway, handball and skiing (Nordic games) have had similar experiences when selling their TV rights to pay-TV. These deals lasted only one season.
Advertising channels have always played first fiddle in the US sports rights markets. The major broadcasting networks, national cable networks and the local stations all receive their income from advertising. Although pay service channels such as DirecTV have acquired popular sports rights, these deals have not been as exclusive as the European soccer deals (Cave & Crandall 2000). Pay service channels in the US have been a supplement rather than a competitor to advertising channels. American TV viewers would probably find it difficult to imagine the most attractive NFL games screened exclusively on a pay channel, with only some delayed highlights broadcast on a national network.
Effective auctions are the success formula behind the steep price increases in US sports rights. On a few occasions the sellers have succeeded in orchestrating bidding wars among a number of channels. Open bid auctions seem to have been the most common procedure. Although sealed auctions have been staged, there are ample indications that sellers have leaked information in order to encourage the channels to increase their bids.
In recent years the sellers of European sports rights have also experienced the benefit of staging auctions. When FIFA sold the 2002 and 2006 World Cup soccer rights, the EBU was informed about Prisma’s higher bid. The EBU was encouraged to increase its offer but declined to do so.21Source: Anthony Bunn, EBU. Similar procedures have characterised the auctions of the EPL and other TV rights. It takes time to learn how to benefit from market transactions, however, and the markets for sports rights are no exception. Indeed, at times the European sellers have something to learn from their US counterparts, provided the objective is to maximise TV revenues. For example, TV channels have sometimes been allowed to submit joint bids. Such cooperation reduces the number of bidders as well as the prices. The two Norwegian domestic PSB channels, NRK and TV2, have submitted joint bids for the plethora of Norwegian soccer rights several times. Recently these channels jointly acquired the rights for 2001–2004 at prices considerably lower per capita than in larger markets.22Newspaper articles. Such cooperation has been banned in the US unless the channels belong to the same parent company.
It is important to bear in mind that sellers of sports rights also have other sources of income, such as sponsorship and ticket sales. The more viewers that watch the TV programmes, the higher is the sponsorship revenue. Thus, provided that sponsorship accounts for a large proportion of the overall income, selling the rights to free-to-air channels with high penetration levels might be profitable even if pay service channels submit higher bids.
The preceding sections show that soccer is the most expensive TV sport in Europe and that pay service channels have acquired the most expensive rights. The fees were considerably lower when the rights were held by free-to-air channels and when compared to US prices.
PSB channel regulations reduce their financial capability to bid for sports rights. TV advertising is also regulated. Consequently, sellers of European sports rights have been forced to accept lower TV revenues in cases when maximising exposure has been paramount.
When selling the 2000–2008 rights, the IOC preferred the EBU to Murdoch’s News Corporation for fear of Murdoch re-selling (at least some of) the games to pay service channels. This would have challenged the long-term relations between the IOC and its sponsors, which prefer TV channels with maximum penetration. Another reason was that as the IOC Charter obliges it to uphold the image of universal games, the IOC and the non-commercial PSB channels share a mutual goal of diversity (Preuss 2000). This corresponds to the objectives of non-commercial PSB channels, which also have a policy of maintaining diversity in their programme menus. It is important to bear in mind that the Olympic games also include a large number of moderately popular sports, but commercial TV channels tend to give priority to the most attractive sports and competitions.
The European regulations on Listed Events attempt to prevent popular sporting events from being moved to pay service channels by reducing the number of channels that are allowed to enter the bidding process, and consequently reducing prices. This approach was first launched in the UK when British politicians feared that Murdoch’s BSkyB could acquire the rights to major sporting events on an exclusive basis. This idea was later adopted by the European Union (Official Journal of the European Communities 1999). It is a paradox, however, that the general regulation of European broadcasting paves the way for further regulations.
In the US, the major broadcasting networks have achieved the highest penetration rate. Thanks to more liberal regulations, they are able to submit higher bids than their European colleagues. These networks both have the strongest financial base and the highest penetration level. Consequently, there is no trade-off between maximising exposure and maximising the TV rights, as there is in Europe. Because advertising secures the main income, the channels objectives have been to increase – or to maintain – the rating figures. Ratings are constantly measured, and the actors involved always seem willing to take the steps necessary to improve unsatisfying figures. Sports broadcasting is no exception. The broadcasting networks need attractive programmes to maintain good relations with their affiliates and thereby their overall penetration rate. The more viewers they reach, the higher the prices for advertising slots will be. Hence, the acquisition of attractive sports rights also has indirect income effects. An equivalent system of broadcasting networks and affiliates is not found within European broadcasting. Although European channels also benefit from a high penetration level, there is more benefit in the US.
It may be extremely risky for channels to agree on fixed sports right fees due to the high proportion of sunk costs. This is so in particular for high fees and long-term deals. A number of channels have overestimated the popularity of sports programmes and have been hit by the `winner’s curse disease (Rasmussen 2001). The market conditions may have worsened during the contract period, due to both tougher competition and a recession in the economy. The disadvantage of too many new entrants is that it removes viewers from existing sports programmes, which is the same as leftwards (negative) shift in the established channels’ demand curves. Such fragmentation creates an incentive for all profit-maximising channels to lower their programme costs, although the large proportion of sunk costs renders it difficult to actually reduce such costs. Neither reducing the number of programmes nor the number of viewers helps.
It has been claimed that the so-called «September eleven effect» caused the largest decline in advertising in the US since the Second World War.23Sport Business News.com. Some degree of this recession even hit the European markets. TV channels experienced unforeseen fluctuations that dealt a blow to their rating figures. Several European channels suffered substantial losses from acquiring the 2002 World Cup soccer rights, e.g. the Italian and French channels were hurt by the early exit of their national teams. Thus, their rating figures and consequentially their advertising revenues were reduced for the remainder of the tournament.
One way around such problems is to include contract clauses that tie the rights fees to rating figures, thereby letting seller and buyer share the risk. So far, however, the tough competition among the TV channels has paved the way for a «sellers’ market». Thus the sellers have not been forced to share the risk with the TV channels. Should the current financial problems continue, however, this pattern may change.
However, since the acquisition of sports rights also generates indirect revenues, the profitability of the deals cannot be judged entirely on the basis of their direct revenues and costs. It is common knowledge that a proportion of the viewers of a sports programme tend to «stay with the channel» and continue watching the next programme (s). Such lag effects increase the overall rating figures and thereby the advertising revenue.
European soccer has benefited from offering a number of tournaments. Until recently, it was impossible for a single channel to buy all the matches because of lack of capacity. Although capacity is no longer a scarcity thanks to the digital revolution, it is still impossible for a single channel to acquire all the rights due to the extremely high prices. Spreading the products over several channels also reduces the risk of being boycotted by channels that find the prices too high. In addition, for many channels it is extremely difficult to boycott news coverage of soccer because of its enormous popularity. Soccer products have thus been divided and tailored to suit the specific channels. An example of this is the highlight programmes that have mainly been acquired by PSB channels. Such widely distributed coverage has been important for recruitment to and sponsorship of the sports in question.
Pay service channels have also acquired the rights to other sports. As mentioned above, this has been a mixed success. British rugby illustrates some major differences between soccer and the so-called number two sports. The number two sports run a risk of being boycotted if they sell their rights exclusively to pay-TV. This may reduce the sport’s recruitment as well as the value of their sponsorship deals. Similar problems have also been suffered by the sellers of secondrated soccer products. In the UK, a majority of soccer enthusiasts had been subscribing to BSkyB for several years when ITV-Digital entered the market. BSkyB held the rights to live matches from the EPL, which the viewers found considerably more attractive than Nationwide League. Thus, ITV-Digital’s variety of second-rated soccer products did not tempt a sufficient number of subscribers to render the deal profitable. ITV even held the rights to UEFA’s Champions League, but a considerable number of those matches were broadcast on their free-to-air channel.
It is important to bear in mind that Europe is not a homogeneous market. The prices of sports rights vary substantially from one nation to another, even when adjusted for differences in population size. Domestic soccer rights are extremely more expensive in the five big nations than in the rest of Europe. One reason for this is that the quality of those matches are higher than in the smaller nations. In addition, viewers in smaller nations also watch matches from the leagues in «the big five leagues». The cultural discount for soccer is small. Thus, the English Premier League, the Italian Serie A and the Spanish Premier leagues enjoy tremendous popularity even outside their domestic markets. Besides, the proliferation of multinational soccer teams has further stimulated such international interest. However, this reduces the income potential of the domestic leagues in the smaller nations. Sports enthusiasts and advertisers, like anybody else, have limited amounts of money and time.
The different position of pay service channels on the two continents also reflects differences in the relations between the advertising channels and the sellers of sports rights. In the US, solid structural bonds have developed between advertising channels and the leagues. It is often claimed that US sports are tailor-made to suit advertising channels. For instance, the most popular team sports have short periods of playing time, often broken off by «time-outs». Thanks to such breaks, there is ample opportunity to screen commercials, hence allowing advertising channels a competitive edge over pay service channels.
In the US, sports programmes generate substantial amounts of advertising revenue. Advertisers have learnt how to use sports broadcasting for the efficient promotion of products. The Super Bowl final epitomizes this situation. As the commercials receive substantial attention, this event has acquired star status among advertisers, and it has evolved into an arena for promoting new products and/or new commercials. Because of this massive interest, the price of a 30 second ad slot has surpassed $2. 2 million,24Sport Business News.com. while the most expensive ad slots at the 2002 Winter Olympics cost $600,000.25Sport Business News.com. Advertisers would not be willing to spend such sums of money without achieving immense promotion effects. The sports and/or the competitions have also been adapted in order to maximise their popularity among the TV viewers. The TV-right contracts include clauses that guarantee TV channels the right to interview players off the field, and some even contain the right to make the coach wear a microphone.
Establishing mature relationships between sellers and buyers is a time consuming exercise, and advertisers are not qualified to benefit from involvement in sports broadcasting overnight. It is no coincidence that pay service channels started their successful acquisition of soccer rights when commercial broadcasting in Europe was in its infancy. The structural bonds between the channels and their advertisers were quite immature in the early 1990s. BSkyB acquired the EPL rights for the first time in 1992 at a price that tripled the value of the existing deal. The previous holder, ITV, would have needed a huge increase in advertising revenues to challenge BSkyB’s bid. This would, however, have been a very risky deal, not only for ITV, but also for their advertisers who were quite inexperienced with sports broadcasting at that time. Moreover, the general restrictions on TV advertising reduced the channels’ ability to benefit from sports broadcasting. It seems fair to say that pay service channels were in the right place at the right time.
Pay service channels have had difficulties attracting subscribers in markets with a large number of free-to-air channels, e.g. in Germany with its more than 30 free-to-air channels. This explains why Premiere, the pay service channel owned by Kirch Media, has not achieved the same success as its colleagues in other European countries.
Contrary to developments within US team sports, soccer federations have not allowed advertising channels to alter the way soccer is played. A soccer period is still 45 minutes and contains no natural breaks. This reduces the room for commercials. It is no coincidence, then, that a second break was proposed during the 1994 World Cup soccer finals in the US. This proposal was strongly opposed by soccer’s governing bodies, however, and has not received serious attention since. Other sports federations, on the other hand, have instigated changes in order to increase their popularity with TV viewers. Let it suffice to mention skiing, i.e. Nordic games, which in recent years have introduced both joint start and shorter distances in order to cater for television audiences. Biathlon is another example.
The majority of pay service channels have quite a narrow menu of programmes which appeals to a special interest audience. It is likely that subscribers feel commitment to the channel that gives priority to their personal interests. If not – why would they be willing to pay? This is different for «free-to-air» channels, which are often included in local cable packages or in «satellite packages». It is no coincidence that the European pay service channels have achieved most success with their soccer rights acquisitions. According to the rating figures, soccer is the sport that European TV viewers feel the strongest commitment to.26Kagan Media Ltd.: European TV Sports 2000 Databook.
A channel that submits bids for expensive sports rights becomes extremely vulnerable. However, the risk is reduced if the viewers are strongly committed to the channel as well as to the sport in question. Incentives are strong for channels to continue acquiring the sports programmes that have granted their success. According to SkyB’s surveys, more than fifty per cent of its own viewers would have cancelled their subscription if the channel lost its soccer rights. In such cases, the alternative to continuing acquiring such rights is probably going out of business.
Pay service channels have been the most successful when holding the exclusive rights to a tournament or a league. The viewers are not equally committed to the channels if some of the matches happen to be screened on free-to-air channels. Thus, the strong position of pay service channels is threatened if sellers are forced to split the leagues between various channels, as has been proposed by the European Commission.
This article has shown that Europe has only partly adopted the North American model for distributing sports rights after the deregulation of European broadcasting in the mid-1980s. The prices, especially for soccer rights, have increased substantially. The main reason for this is the tough competition among an increasingly greater number of pay service channels.
The European prices have been considerably lower when the programmes were broadcast on channels with maximum penetration level – at least compared with prices in the US. It is the PSB channels that have the highest penetration level, and they are unable to match the high bids of the US broadcasting networks because of strict regulations.
The tight regulation of advertising within European broadcasting explains the strong position of pay service channels – a major difference between the two continents. Advertising channels have not developed such solid structural bonds to the sellers of sports rights as in the US.
The acquisition of sports rights is extremely vulnerable to negative changes in demand since a high proportion of the costs are sunk costs. If revenues decline, neither spending less on programmes nor broadcasting the programmes to fewer viewers is of any help. It should not come as a surprise, then, that a number of unprofitable deals must also be taken into consideration.
Denne artikkelen er en del av et større forskningsprosjekt om medie- og sportsrettigheter ved Senter for medieøkonomi ved Handelshøyskolen Bl, støttet av Norges forskningsråd og Norges Fotballforbund.
|1||The Economist (1996): «Swifter, higher, stronger, dearer», 20 July 1996.|
|2||Kagan World Media Ltd. (2001): Kagan European Sports, May 2001.|
|3||Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London.|
|4||Source: Kagan World Media Ltd. (1996): European Television Channel & Country Profiles|
|5||All figures in the tables are in nominal values.|
|6||Kagan Sports Newsletter 2000.|
|7||Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London.|
|8||Source: Kagan Media Ltd.: European TV Sports 2000 Databook|
|9||Kagan Media Ltd.: European Sport, Nov. 2001.|
|10||Baskerville Communication Corporations (1997): Global TV-Sports Rights.|
|11||Sport Business News 2001.|
|12||Kagan Media Ltd.: European Sport, May 2001.|
|13||Not including Canada.|
|14||Source: Sport Business News.com|
|15||All calculations are based on the 1999 populations, which were 276. 2 million in the US and 58.7 million in the UK.|
|16||Source: Baskerville Communication Corporations (1999): Global TV-Sports Rights, second edition, London.|
|17||Baskerville Communication Corporations (1999): Global TV-Sports Rights – second edition, London.|
|18||Baskerville Communication Corporations (1997): Global TV-Sports Rights.|
|19||Sport Business News.com.|
|20||EBU represents 65 member broadcasting organisations in 49 countries, mainly across Europe, but also in the Middle East and North Africa.|
|21||Source: Anthony Bunn, EBU.|
|23||Sport Business News.com.|
|24||Sport Business News.com.|
|25||Sport Business News.com.|
|26||Kagan Media Ltd.: European TV Sports 2000 Databook.|