Wholesale must offer in Premium Sports TV networks

Wednesday, March 16, 2011, 13:48

by David Agius MP

It is appropriate to address the inefficiencies related to the distribution of premium sports content over pay-TV networks in Malta and in so doing provide the regulatory, economic, technical and operational justification of creating a wholesale must offer regime as the best remedy to address such inefficiencies.

Market Inefficiencies

The distribution of live sports events over premium pay-TV distribution networks in Malta, dates back to 1992/3 with the first live distribution of the English Premier League by the incumbent cable operator, namely Melita Cable.

Over time the cable operator invested in the acquisition of more sports properties, such as the Italian Serie A, Wimbledon, FA Cup to name a few and in so doing started building a very compelling premium sports package.

Given the dynamics of live sports and the issues related to sports scheduling the cable operator needed to put into the market more than one sports dedicated channel. As a matter of fact, prior to the launch of Digital TV, the cable operator distributed all of its sports content over two (2) dedicated premium channels and at times substituted channels momentarily to add other live sports events.

 The liberalisation of the pay-TV market and the advent of Digital TV changed the landscape of the acquisition of sports programming and its distribution. In order to appreciate the impact of multiple pay-TV operators in a Digital TV environment, it is important to first explain in brief the process of setting up a sports channel (including the process of acquiring content).

Sports channels are normally made up of live events, sports news, features, magazine programmes and repeats of live events. The content is acquired through various sources including, directly from the sports associations, production companies and media agencies. It is fundamental to note that in most cases sports rights (the right to distribute sports content) across media channels such as TV, Online and Mobile, is sold by the authorised rights holder on an EXLCUSIVE basis. This is a condition set by the entity selling rights and is considered to be a key element in leveraging the value of such rights. Sports rights are also normally sold on a territory by territory basis such that rights sold to a distributor in one country preclude any other entity to leverage the same rights in the same country. It should also be noted that negotiations for sports rights normally regulate the distribution of exclusive sports content for a period of time (in most cases for duration of not more than three (3) years).

It is also important to address the issue of the illegal distribution of pay-TV through card-sharing satellite systems

It is also important to address the issue of the illegal distribution of pay-TV through card-sharing satellite systems

The restriction in distribution, coupled with a very strong demand for live sports content in respective territories tend to increase the value of sports rights, so much so that in mainstream countries the value of sports rights generates the highest revenue for sports associations. It is estimated that 70% of the revenue generated by top English Premier League Clubs is through the redistribution of funds generated from TV rights.

It is therefore very easy to comprehend that an unregulated market for the distribution of sports rights will without doubt lead to an escalation in the value of sports rights at the acquisition stage leading to an escalation of retail prices and a tendency for operators to over protect their investment.

 

The Scenario in Malta

The market in 2004 was characterised by one pay-TV operator, namely the cable operator Melita Cable. The operator in this context could dictate the price for buying TV rights from various associations or their agencies during the acquisition process. This position of strength led to the cable operator amassing an assortment of rights and creating a compelling sports franchise.

In reality until 2004, Melita Cable provided an affordable and compelling sports channel including sports events from the foremost sports disciplines, most notably the English Premier League and FA Cup, the Italia Serie A and at times also the UEFA Champions League.  

Once the Government of Malta (GOM) issued two (2) Digital Terrestrial Licences and formal competition was introduced, the landscape for the acquisition and distribution of sports content changed drastically.

As soon as Multiplus (the first DTT operator later sold to Maltacom plc) came to the market, the rights owners of exclusive sports content took control of the negotiating process and as anticipated the cost of acquisition of sports content increased exponentially.

It is difficult to calculate exactly the rise in the costs of acquiring sports content but in many some countries the cost index rose by 100 times in a very short period of time. Therefore for every €1 spent, the operators now required to spend €100. The speculative value of the last round of the English Premier League bid in 2009 governing seasons 2010/11 – 2012/13 when compared to the value prior to the introduction of formal competition indicates that even in Malta the cost index may have risen by 100 times.

The impact of this reality is very clear in that operators cannot afford to acquire the same amount of content as before and due to the increase in costs they have to pass on higher prices to the consumers.

 Therefore the impact on consumers is negative and the most obvious effects are:

  1. Hike in the price of premium sports packages.
  2. Hike in the price of other content.
  3. Sports content shared amongst different technology platforms.
  4. Sports content not accessible over the same platform.

This scenario has come to effect in Malta over the last four (4) years but has escalated and has become of grave concern to the viewing public in summer 2010.

As the two (2) operators, Melita and GO battle it out with right owners for the exclusive distribution of sports rights, different sports properties in high demand have been split amongst the operators, thereby not offering the possibility to consumers to access content that is in high demand to be viewed on the same platform through the same customer premises equipment.

This is a normal consequence of the current ‘unregulated’ market situation. The symptoms that this situation was about to unfold started in 2006 when Multiplus managed to secure the rights of the Italian Serie A for a price multiple close to 5 times the value. Melita thereafter regained the Serie A rights for yet another exponential price hike in order to exploit the content that is considered to be in high demand.

When Multiplus was taken over by a stronger player in the Electronics Communications Market, namely GO, it was inevitable that the situation with TV rights for sports content would change and that it was impossible for one operator to eventually bid and win all the major sports properties.

The bidding war escalated during the bidding process for the FA CUP rights in 2007, to thereafter impact also the Football Club Channels of the most popular international  teams in Malta such as Manchester United TV, Liverpool FC TV, Arsenal TV and Chelsea TV, Juventus Channel, Milan Channel, Inter Channel and Roma Channel. Other sports properties came into the mix and sports rights such as the ATP Tour and Wimbledon also changed platform.

The bidding/negotiation process for the right to distribute exclusive sports content is a continuous process in which operators seek to acquire the sports rights that they perceive to be of most value, sometimes even at prices that would render such content unfeasible from an investment perspective.

The situation in Malta reached its climax and continued to complicate itself when GO managed to acquire the media distribution rights of the English Premier League for the first time. This was followed shortly the acquisition of the Italian Serie A. In this scenario the content in high demand was split between the two (2) operators distributing content via different platforms. This led to consumer unrest. Consumers accustomed to have access to the most popular content via one system now required additional investment and higher monthly fees to access the same content.

The result of the current situation, which in part is due to the unregulated nature of the market, was inevitable. Consumers face higher upfront and monthly costs to have access to the top three (3) sports properties in Malta. Moreover, the current regulatory framework does not safeguard the consumers from eventually having to undertake further investment, should a third operator enter the market and rights are split amongst more operators.

The situation where the rights for the top three (3) sports properties are shared amongst three operators is plausible. This would result in consumers requiring a separate connection to three different operators.

 Wholesale Must Offer Rationale

The current market imperfections can be remedied very efficiently through the introduction of a wholesale must offer that is inserted as an additional obligation to the broadcasting license of pay-TV operators. How would this work and why is this effective?Firstly, it should be noted that the premium channels distributed by the two (2) operators over their respective networks are regulated by the Broadcasting Authority (‘BA’). The operators are required to seek a license for every channel that they own. This is not the same for all the other channels that are considered ‘rebroadcast’ channels.

The current market imperfections can be remedied very efficiently through the introduction of a wholesale must offer that is inserted as an additional obligation to the broadcasting license of pay-TV operators

The current market imperfections can be remedied very efficiently through the introduction of a wholesale must offer that is inserted as an additional obligation to the broadcasting license of pay-TV operators

A rebroadcast channel is a channel that the operators retransmit in its entirety after having negotiating what are called ‘carriage rights’ from the channel owner. Operators obtain rights to transmit such channels over their respective networks but have no control over the channel’s content and editorial composition. For most channels in Malta, the operators also have no right to sell and insert adverts during the advertising breaks of such channels. Examples of a rebroadcast channels include Discovery Channel, Eurosport and MGM.

 I have purposely included three (3) channels from different genres to illustrate that rebroadcast channels can be created from documentary content, sports content and cinema content. The distribution of rebroadcast channels is not regulated by the BA but by the MCA, since the pay-TV operators require a notification from the MCA to act as licensed Electronic Communications Providers.

The premium sports channels of both local pay-TV operators are not rebroadcast channels. They are channels that are scheduled by the operator, that have advert insertions, that may have an editorial policy, and that are also priced over and above the basic content. These channels and their content are regulated by the BA. The authority regulates the type of content, the amount and type of permissible advertising and is responsible to oversee that the content distributed is within the framework of the Broadcasting Act. The BA also regulates and monitors to ensure that if any premium content distributed by the pay-TV operators is within the schedule of ‘Events of National Importance’ this content is distributed via a free-to-air channels in Malta.

The BA also regulates and updates the events that form part of the schedule of events of national importance. It is due to these powers vested within the BA that I am confident that the solution for providing affordable access to popular sports content is found within the BA and that the wholesale must offer obligation must be led by the BA.

Learning from the OFCOM experience

After thorough market analysis in the UK, the regulator (‘OFCOM’), decided to impose a wholesale must offer on the dominant player in the market by including incremental obligations to its broadcast licence. In essence, BSkyB was considered to have a dominant position in the UK pay-TV market and as such was obliged to provide its sports channels to other players in the market, including newcomers in this space distributing content over IP networks and mobile.

It is a known fact that the imposition of such obligation on BSkyB ensured that the most popular sports content in the UK is made available to all pay-TV subscribers via one subscription. Therefore, a Virgin Media subscriber (the foremost cable operator in the UK and the No.1 competitor to BSkyB) can access the sports channels available on Sky, namely Sky Sports 1, Sky Sports 2, Sky Sports 3 and their HD equivalent through a wholesale offer that BSkyB has negotiated with Virgin.

OFCOM has also made this obligation more stringent on BSkyB by fixing the pricing parameters of the wholesale offer. This however is still in a process of appeal.

Adopting the UK model to Malta

In essence the recommendation for a remedy in Malta has three (3) steps and would include the following:

  1. 1.      To amend the broadcast license of the two (2) operators namely, Melita and GO and to insert such obligation to eventually additional operators seeking to investment in the pay-TV market in Malta by including a wholesale must offer for premium pay-TV content that is considered to be in popular demand.
  2. 2.      To inform all licensed operators that with immediate effect, all new contracts signed with rights holders of sports content in high demand, regardless of their inherent exclusivity nature must form part of the wholesale must offer, even though this obligation may not as yet have been added to their broadcast license.
  3. 3.      To inform all licensed operators that from the start of the football season 2011/12, all sports properties that are in popular demand featured in the operators sports channels must be wholesaled to the other operator at reasonable prices and that if the operators cannot find the right formula for wholesaling the content, the formula will be imposed by the local competent authorities.

 Action Item 1: 

To amend the broadcast license of the two (2) operators namely, Melita and GO and to insert such obligation to eventually additional operators seeking to investment in the pay-TV market in Malta by including a wholesale must offer for premium pay-TV content that is considered to be in popular demand.The BA inserts a wholesale must offer condition in the broadcast license of the two (2) pay-TV operators, and eventually in the broadcast licence of new pay-TV operators entering the Malta pay-TV market. The wholesale must offer would include the following:

The licensee shall offer the programme content of the licensed service to any person for retail by that person to residential consumers in Malta on a qualifying platform:

  1. a.       Upon request in writing;
  2. b.       Within no longer than 3  months from request in writing;
  3. c.        On a non-exclusive basis;
  4. d.       On fair and reasonable claims;
  5. e.        Without any undue discrimination; and
  6. f.         In accordance with the requirement of this Condition and any direction issued by the BA under this licence

The BA would give the licensee 1 month to respond to a formal request providing the person with the terms and conditions under which offers shall be made. The standard terms must include as a minimum:

  1. a.       Charges for supply;
  2. b.       Minimum qualifying criteria;
  3. c.        Terms of payment and billing procedures including basis for calculating paying subscribers;
  4. d.       Arrangements under which material changes to the content of the licensed service shall be notified;
  5. Dispute resolution procedure

The BA would be responsible for ensuring that the licensee complies with the terms and conditions for supply of service and will monitor and investigate to safeguard compliance.

In the event a person accepts an offer, the licensee shall use its best endeavours to enable that person to commence retailing no longer than 4 months from receipt of formal offer.

For the purpose of wholesale must offer:

‘Person/s’ means a licensed pay-TV operator with a valid broadcasting license and a notification as an Electronic Communications Provider;

‘Programme Content’ means the content that from time to time is considered by the BA to be in high demand and must therefore be included under the wholesale must offer;

‘Licensed Service’ the resultant content packaged in the form of a channel or group of channels that is made available by the licensee under the wholesale must offer;

‘Minimum Qualifying Criteria’ means the minimum requirements that must be satisfied by a potential purchaser requesting supply under the wholesale must offer. These requirements may include (a) financial standing, (b) technical standards for retail provision of content, (c) technical standards for securing wholesale supply of content and (d) encryption and security;

‘Qualifying Platform’ means any platform used for the distribution of programmes to residential consumers in Malta, other than a platform operated solely by the licensee.

Action Item 2: 

To inform all licensed operators that with immediate effect, all new contracts signed with rights holders of sports content in high demand, regardless of their inherent exclusivity nature must form part of the wholesale must offer, even though this obligation may not as yet have been added to their broadcast license.

Inform with immediate effect all licensed Electronic Communications Providers with a broadcast license that distribute their own premium content via a number of specific channels, that the wholesale must offer will regulate all future sports right acquisitions of premium content in popular demand.

For the purpose of the wholesale must offer:

Premium content in popular demand’ means the distribution on any media channel of the live transmissions of the English Premier League, the Italian Serie A, the UEFA Champions League, other than those transmissions that are already included in the schedule of Events of Major Importance.

By so doing the upcoming negotiations for the UEFA Champions League for the period 2012-2015, earmarked for March-May 2011, and the upcoming negotiations for the Italia Serie A for the period 2012-2015 (not yet scheduled), would be governed inter alia by the wholesale must offer.

In practice this would mean that the licensees that would like to negotiate and distribute events from these two (2) properties as well as the English Premier League in future are well aware of their wholesale obligations ahead of time.

Action Item 3:

To inform all licensed operators that from the start of the football season 2011/12, all sports properties that are in popular demand featured in the operators sports channels must be wholesaled to the other operator at reasonable prices and that if the operators cannot find the right formula for wholesaling the content, the formula will be imposed by the local competent authorities.

This is considered the most difficult item to attain due to the complexities of the current situation and the limited timeframe involved. Yet, the basis for working towards this objective needs to be clearly understood and executed.

The implication of Action Item 3 is that of imposing a wholesale must offer on the two (2) operators from the start of the next football season in August 2011 while protecting the investments undertaken by the operators in securing those rights.

The formula for doing this may not be straightforward but I humbly suggest that the mechanics will be as follows:

  • Operators must provide wholesale access of all or a subset of their channels that include live events of premium content in popular demand;
  • Operators are given till June 2011 to redesign their premium level channel structure to include the minimum content threshold acceptable by the BA;
  1. a.       Minimum content threshold of the UEFA Champions League is at least four (4) games per Matchday in the qualifying round stages with priority given to games involving English, Italian, Spanish and German teams;
  2. b.        Minimum content threshold of the English Premier League includes at least 25 games from each team in the English Premier League that in the preceding year finished in the top 6;       
  3. c.        Minimum content threshold of the Italian Serie A includes at least 25 games from each team in the Italian Serie A that in the preceding year finished in the top 6;
  • Each operator must provide a wholesale offer based on the value of the rights paid in the last round of negotiations, amortised over the period of the contract. The value of the wholesale offer is based on the total value of the rights contract plus the technical costs involved divided by the amount of years remaining under contract.
  • The value of the wholesale offer must also include a Minimum Guarantee based on the number of subscribers expected to avail from the wholesale offer.
  • The wholesale offer must determine the placing of the licensed content within the content plan of the operator to ensure a level playing field and safeguard the investment undertaken by the licensor. This means that if the English Premier League rights holder in Malta is GO and GO has 3 Sports Channels where games of the English Premier League are shown and these channels are packaged together in such a way that to avail of this package you need a buy-through of a basic package, then the person (i.e. Melita) cannot offer the GO Sports package without the need of a similar buy-through. For the purpose of the wholesale must offer, buy-through is considered as the basic package required by a subscriber to avail thereafter of the premium sports package.
  • The wholesale must offer would also include the basis for the wholesale pricing. The mechanism used here is retail price less a commission. The value of the commission should vary between 15% and 20%
  • The wholesale must offer must also include a term which is equivalent to the term that the rights yet have to expire:
  • English Premier League June 2013
  • Italian Serie A June 2012
  • UEFA Champions League June 2012

The implementation of ACTION ITEM 3 as proposed would in practice mean that starting from August 2011, GO and Melita Cable will offer each other a wholesale offer for their sports channels that entail content from the UEFA Champions League (Melita) and English Premier League & Serie A (GO).

A thorough review of the scheduling requirements of these 3 sports properties and the obligations emerging from the wholesale must offer would imply that the operators would need to provide each other no more than 4 sports channels as follows:

            GO Sports

            Four (4) channels of sport that would include the following live fixtures based on the current scheduling of the English Premier League (EPL) and Italian Serie A (SA) covering the majority of the weeks in which the leagues are played.

League Day Kick Off GO Sports 1 GO Sports 2 GO Sports 3 GO Sports 4
English Sat 12.30pm X      
English Sat 3.00pm X X X X
Italian Sat 6.00pm X      
English Sat 6.30pm   X    
Italian Sat 8.30pm X      
Italian Sun 12.30pm X      
English Sun 3.00pm X      
Italian Sun 3.00pm   X X X
English Sun 5.00pm X      
Italian Sun 8.30pm X      
English Mon 9.00pm X      

           

            It should be noted that both the English Premier League and Italian Serie A normally have 4 to 5 match days that are played during the week and are normally played concurrently.

In such  an instance whenever the English Premier League and Serie A do not coincide, 4 live games per league are broadcast.            

In such situations when the EPL and SA schedule match days during the week on the same day at the same time, then 2 games of the EPL and 2 games of the SA would be broadcast.

As can be noted from the amount of games scheduled on GO SPORTS 1, during the match days when the EPL and SA have coinciding mid-week fixtures the first pick of either the EPL or SA must be broadcast on GO SPORTS 1. In this manner GO SPORTS 1 would retain its status as the flagship premium sports channel.

It should also be noted that the last 2 rounds of the EPL and SA, that is week 37 and 38 of both leagues are always scheduled on a Saturday (EPL) and Sunday (SA). In week 37 and week 38, 4 out of the 10 corresponding fixtures are broadcast on the GO Sports channels.

Melita Sports

            Four (4) channels of sport that would include the following live fixtures based on the current scheduling of the UEFA Champions League covering the majority of games featuring English, Italian, Spanish and German clubs in the qualifying league rounds and all games within the knock-out stages of the competition. It should be noted that the semi-finals and final of the UEFA Champions League must be broadcast also on a local free-to-air channel since these games are listed as broadcast events of national importance.

Match Day Day Kick Off M Sports 1 M Sports 2 M Sports 3 M Sports 4
1,3,5,7 Tuesday 8.45pm X X X X
2,4,6,8 Wednesday 8.45pm X X X X
Last 16 1st Leg Tuesday 8.45pm X X    
Last 16 1st leg Wednesday 8.45pm X X    
Last 16 2nd leg Tuesday 8.45pm X X    
Last 16 2nd leg Wednesday 8.45pm X X    
QF 1st leg Tuesday 8.45pm X X    
QF 1st leg Wednesday 8.45pm X X    
QF 2nd leg Tuesday 8.45pm X X    
QF 2nd leg Wednesday 8.45pm X X    
SF 1st leg Tuesday 8.45pm X      
SF 1st leg Wednesday 8.45pm X      
SF 2nd leg Tuesday 8.45pm X      
SF 2nd leg Wednesday 8.45pm X      
Final Saturday 8.45pm        

To conclude I must say that the imposition of a wholesale must offer is complicated but enforceable. It should cater first and foremost for consumer rights while protecting and stimulating further investment in the market. The final decision should also keep in mind a number of provisions including:

According to Agius' proposal a minimum content threshold of the Italian Serie A includes at least 25 games from each team in the Italian Serie A that in the preceding year finished in the top 6

According to Agius' proposal a minimum content threshold of the Italian Serie A includes at least 25 games from each team in the Italian Serie A that in the preceding year finished in the top 6

  1. That the Wholesale Must Offer on pay-TV operators for premium content does not create an international precedent that would induce international rights holders to withhold the distribution rights in Malta.
  2. The Wholesale Must Offer on pay-TV operators improves the accessibility of content and stimulates investment in the procurement of content through wider distribution.
  3. The Wholesale Must Offer on pay-TV operators is not too complicated operationally, creating larger artificial costs to operators that are passed on eventually to the end-consumers.

I am very optimistic that the BA route is the most plausible and realistic one to attain the results. Yet the consumer division, probably under its new structure (after Bill 66 ie The Malta Competition and Consumer Affairs Authority Bill is passed through parliament), should do its job to ascertain that the most popular content is that as described in my article and that the current situation poses an unfair position on consumers.

From its end the MCA should also work to define the premium pay-TV sports market in its own right and thereafter find as would be the case that both entities have joint dominance.

The process of bringing together the BA, Consumer Division and MCA to work on this is rather cumbersome since all entities report to different bodies and have their own agendas and objectives. Yet it is also true that this can be scaled as an issue of national importance and therefore requires a quick and efficient plan of action.

I conclude my article by saying that to obtain maximum support from operators it is also important to address the issue of the illegal distribution of pay-TV through card-sharing satellite systems, notably Dreambox suppliers since this remains the largest threat for pay-TV operators.





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