Are Pay-Tv and OTT in the Same Relevant Market in South Africa?*
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Occasional Note February 2019 Are pay-tv and OTT in the same relevant market in South Africa?* Elize Rich This research note is aimed at answering the question of substitutability between pay-television services (e.g. Multichoice’s DStv) and over-the-top services (OTT), (e.g. Netflix), in a South African context. This question is especially relevant, against the background of the planned listing of Multichoice on the Jo- hannesburg Stock Exchange during the first quarter of 2019, and the ongoing inquiry into subscription broadcasting services by the sector regulator, ICASA. The nub of the issue is the question whether pay-television and OTT services fall in the same relevant anti-trust market. The answer to this question will determine who has market power and whether ex-ante regulation of such market power is justified. These are important issues as policy interventions should not stifle the rapid technological developments that are characteristic of this sector. This occasional note considers these issues from an economic perspective. We highlight the fact that relative to markets with high levels of OTT penetration (e.g. the United States and Canada), South Africa has low levels of internet penetration, slow internet speeds and comparatively high data prices, all of which limit the potential substitution of pay-TV with OTT services. This requires original thinking and ap- plication of economic principles about relevant markets, in this country-specific context. About ECONEX ECONEX is an economics consultancy that offers in-depth economic analysis, covering competition economics, inter- national trade, strategic analysis and regulatory work. The company was co-founded by Prof Nicola Theron and Prof Rachel Jafta during 2005. Both these economists have a wealth of consulting experience in the fields of competition and trade economics. They also teach courses in competition economics and international trade at Stellenbosch Uni- versity. For more information on our services, as well as the economists and academic associates working at and with Econex, visit our website at www.econex.co.za. * Econex presented comments on ICASA’s inquiry into subscription television broadcasting services on behalf of Econet/Kwesé. 1 Occasional Note February 2019 1 Introduction relevant antitrust market is cru- must consider when they poten- cial for determining dominance tially want to substitute pay-TV and the need for regulatory in- with OTT. However, it first takes The broadcasting sector as tervention in the broadcasting a step back to look at internet a whole is evolving, closely sector. Based on South Africa’s access and internet speeds re- aligned with the fast-paced de- limited internet penetration, quired for streaming content. velopments in technology. In low internet speed and high We find that South Africa’s in- South Africa, the sector has cost of data, ICASA found that ternet penetration is low com- lately been under the spot- OTT does not fall in the same pared to other countries where light. Towards the end of 2018 relevant market as pay-TV, stat- OTT is prevalent, the internet is the Competition Commission ing that “…the impact of OTT is generally slow, and data is ex- found that the channel distribu- expected to remain small but pensive compared to countries tion agreement between SABC noticeable in the foreseeable with high OTT (specifically, Net- and Multichoice entered into future.”3 flix) penetration. in 2013 amounted to a notifi- able merger1. The sector has Competition economists often To examine the price aspect also received attention from the rely on the SSNIP test4 to de- in the decision between pay- communications regulator, In- fine the relevant market, but in TV and OTT services, we com- dependent Communisation Au- markets that are already highly pare the monthly cost of a pay- thority of South Africa(‘ICASA’), concentrated the SSNIP test TV subscription with the total who initiated an Inquiry into could indicate a larger relevant cost of OTT. While it is easy to Subscription Television Broad- market than is truly the case – think that consumers must only casting Services. Later this we consider this in Section 2.2. weigh up the cost of the pay- month the largest provider of Since ICASA estimates Mul- TV subscription and OTT sub- subscription broadcast services tichoice holds a 98% market scription, they must in fact also – Multichoice – will list on the share of subscription television take into account the cost of Johannesburg Stock Exchange broadcasting homes5, it is nec- internet access that is suitable (‘JSE’)2. essary to rely on a broader set for streaming when calculating of data to determine whether the total cost of OTT. Even with In addition to Multichoice, pay-TV and OTT are in the same the conservative assumptions which owns DStv, pay-televi- relevant market. made in our comparison, we sion providers in South Africa find that apart from DStv Premi- include Kwesé/Econet, StarSat, When deciding between pay- um and Deukom subscriptions, Deukom and OpenView HD. TV and OTT, consumers con- the total cost of OTT for various Whether or not pay-TV (e.g. sider aspects such as price and combinations of OTT subscrip- Multichoice’s DStv) and over- content, amongst others. This tions and internet packages are the-top services (‘OTT’) (e.g. Occasional note focuses on the generally higher than pay-TV Netflix) forms part of the same de facto price that consumers bouquets. There will therefore 1. https://www.businesslive.co.za/bd/national/2018-11-11-new-twist-emerges-in-sabc-multichoice-saga/ 2. https://mybroadband.co.za/news/business/292966-multichoice-group-releases-pre-listing-statement.html 3. Discussion Document: Inquiry Into Subscription Television Broadcasting Services, published under Notice 642 of 2017 in Government Gazette No. 41070 dated 25 August 2017. (para 4.9.1 – 4.9.5) 4. Small but Significant Non-transitory Increase in Price (‘SSNIP’). 5. Discussion Document: Inquiry Into Subscription Television Broadcasting Services, published under Notice 642 of 2017 in Government Gazette No. 41070 dated 25 August 2017. (para 4.3.5) 2 Occasional Note February 2019 be households that would not that consumers consider pay- other countries. Nonetheless, substitute their pay-TV subscrip- TV and OTT as complementary the experience in other coun- tion with an OTT subscription products, rather than substi- tries provides context for under- in the event of a pay-TV price tutes. In addition, it is expected standing the local market. increase. that in the short-term South Af- rica’s internet penetration – and In the UK the total number of Many households already have particularly broadband access – subscriptions to Netflix, Amazon internet access. The compari- will remain low relative to other and NOW TV recently for the son of substituting pay-TV and countries with OTT, excluding first time exceeded the number OTT, however, is still not only some consumers from substitut- of subscriptions to traditional between the monthly subscrip- ing pay-TV with OTT. pay-TV services. The growth tion costs. This is because some in video-on-demand is helped of the households considering A final point to note but which by the growth in the number the switch will have to upgrade is not explicitly dealt with in of devices connected to the to viewing devices that are this study, is that the type of internet and more people hav- more suited to watching con- content may also play a role in ing access to faster broadband tent, upgrade to faster internet, consumer switching behaviour. speeds; in 2018, 44% of house- and/or higher data allowances, Some content can be classified holds with a TV had a smart TV all of which will increase their as ‘must-have’ or premium con- or a television connected to the monthly cost from what it is cur- tent, and in ICASA’s Discussion internet in a different way (e.g. rently. Document included e.g. live set-top box or games console) sports. As long as broadcasters and in 2017, 80% of homes We conclude that pay-TV and own the exclusive rights to such had a fixed broadband con- OTT in South Africa are current- content, there will be a portion nection. Nonetheless, 71% of ly in separate relevant markets of consumers that will not sub- those with an OTT subscription from a competition assessment stitute pay-TV with OTT content. also had a pay-TV subscription, perspective. The television mar- This emphasises our findings in indicating that consumers see ket is evolving, however, and it the remainder of this study that the products as complements, may be that pay-TV and OTT OTT and pay-TV services are of rather than substitutes. Many may start competing in future. a complementary nature and more OTT subscribers reported As pointed out when the April not explicitly substitutes. cord-shaving7 (36%) than cord- 2017 Broadcast Research Coun- cutting8 (14%), further empha- cil of South Africa Television 2 Economic theory and sising that viewers do not deem Audience Measurement (‘BRC context the products to be substitutes.9 TAMS’) panel universe update was presented, South Africa’s 2.1 Global and local context A survey of over 140 senior television landscape is currently television industry participants about ten years behind Europe.9 As shown later in this note, the from 48 countries found that Even so, survey data from the South African television market the overall consensus among United Kingdom (‘UK’) indicate is very different from that of respondents is that, for the time 6. https://themediaonline.co.za/2017/04/the-tv-waiting-game-is-it-necessary/ 7. ‘Cord-shaving’ refers to the practice of pay-TV subscribers downgrading to a cheaper bouquet. 8. ‘Cord-cutting’ refers to the practice of pay-TV subscribers cancelling their subscription.