Pay TV in Australia Markets and Mergers

Pay TV in Australia Markets and Mergers Cento Veljanovski CASE ASSOCIATES Current Issues June 1999 Published by the Institute of Public Affairs ©1999 by Cento Veljanovski and Institute of Public Affairs Limited. All rights reserved. First published 1999 by Institute of Public Affairs Limited (Incorporated in the ACT)␣ A.C.N.␣ 008 627 727 Head Office: Level 2, 410 Collins Street, Melbourne, Victoria 3000, Australia Phone: (03) 9600 4744 Fax: (03) 9602 4989 Email: [email protected] Website: www.ipa.org.au Veljanovski, Cento G. Pay TV in Australia: markets and mergers Bibliography ISBN 0 909536␣ 64␣ 3 1.␣ Competition—Australia.␣ 2.␣ Subscription television— Government policy—Australia.␣ 3.␣ Consolidation and merger of corporations—Government policy—Australia.␣ 4.␣ Trade regulation—Australia.␣ I.␣ Title.␣ (Series: Current Issues (Institute of Public Affairs (Australia))). 384.5550994 Opinions expressed by the author are not necessarily endorsed by the Institute of Public Affairs. Printed by Impact Print, 69–79 Fallon Street, Brunswick, Victoria 3056 Contents Preface v The Author vi Glossary vii Chapter One: Introduction 1 Chapter Two: The Pay TV Picture 9 More Choice and Diversity 9 Packaging and Pricing 10 Delivery 12 The Operators 13 Chapter Three: A Brief History 15 The Beginning 15 Satellite TV 19 The Race to Cable 20 Programming 22 The Battle with FTA Television 23 Pay TV Finances 24 Chapter Four: A Model of Dynamic Competition 27 The Basics 27 Competition and Programme Costs 28 Programming Choice 30 Competitive Pay TV Systems 31 Facilities-based Competition 33 Entry Assistance 35 Closed Networks and Competition 37 Broadband Entry Strategies 40 Overbuild and Economic Efficiency 42 The Regulatory Game 43 Conclusions 44 Chapter Five: The Video Marketplace 47 A Common-sense Approach 47 The ACCC’s Analysis 48 Assessing the ACCC’s Analysis 49 Pricing 54 A Radical View of the ACCC’s Merger Test 57 The Number of Channels 59 The Empirical Evidence 61 Concluding Observations 64 Chapter Six: The Foxtel/Australis Merger 69 The Legal Framework 70 The Impact of the Merger on the Pay TV Sector 71 Telecommunications Competition 76 Concluding Remarks 81 Chapter Seven: Policy Implications 85 References 87 iv Preface This book examines in detail an important period in the early develop- ment of pay TV in Australia. The decision of the Australian Competi- tion and Consumer Commission (ACCC) to block the proposed merger between FOXTEL and Australis in late 1997 is analyzed in detail, using the same framework as that employed by the ACCC itself. The conclu- sion is that the ACCC failed to demonstrate that the merger would sub- stantially lessen competition, as it was legally required to do to justify its decision to block the merger. The book is intended as a contribution to the understanding both of competition in the pay TV sector and of Australian merger policy in the communications sector. It is hoped that its adoption of a combative style to discuss such a controversial topic will stimulate public debate on communications and competition policies. I am grateful for the helpful comments provided by three anony- mous referees and Dr Ian McEwin of Case Associates (Australia) on earlier drafts, but remain responsible for any shortcomings in the final draft. I am grateful also to Dr Michael James for his editorial efforts, which have much improved the text. Although the book draws partly on research originally commissioned for FOXTEL Management Pty Lim- ited, the views expressed are solely my own and not those of the IPA or of those mentioned above. Cento Veljanovski May 1999 v The Author Dr Cento Veljanovski is Managing Partner of CASE A SSOCIATES, an economics practice with offices in London and Sydney. He is also an Associate Research Fellow in the Institute of Advanced Legal Studies of the Univer- sity of London. He was editorial and research director of the Institute of Economic Affairs (1988–91) and, until recently, a non-executive director of Flextech plc, the UK’s second-largest pay TV operator. Dr Veljanovski was an expert adviser to the UK government’s influ- ential inquiry on the financing of the BBC (the Peacock Committee). As a Director of the Institute of Economic Affairs, he was at the forefront of public debate on the future of broadcasting in the UK. He has served as an adviser to a large number of media and telecommunications compa- nies on competitive and strategic issues, and in antitrust and regulatory proceedings in the UK, Italy, Ireland, Germany, Australia, and New Zea- land, and before the European Commission. His recent clients include BSkyB, Flextech, Nethold, Telepiu, FOXTEL, News International, MCI Worldcom, Seagram, Cellnet, One2One, Telecom Eireann, Cable & Wire- less and the Australian Radio Network. Dr Veljanovski was educated in Australia and the UK, and holds sev- eral degrees in law and economics (B.Ec. (Hons), M.Ec., D.Phil.). At Monash University he was a student of distinguished trade practices regulators including Professors Bob Baxt (past Chairman of the Trade Practices Com- mission), Allan Fels (present Chairman of the ACCC) and Maureen Brunt, Australia’s most distinguished trade practices economist and former mem- ber of the Trade Practices Tribunal. He has held academic posts at Oxford University and the University of London, visiting appointments at the University of Toronto (where he was Visiting Professor of Law and Eco- nomics), New York, Miami and Monash Universities, and fellowships with the Australian Law Reform Commission, the Centre for Socio-Legal Stud- ies (Oxford University), and the Centre for Economic Policy Research (Lon- don). He was for a short time with the Australian Treasury. He has written widely on the media, including Choice by Cable: Eco- nomics of a New Era in Television (1983), Freedom in Broadcasting (1989), The Media in Britain Today: The Facts, The Figures (1990), Privatisation of Channel 4 (1996), and The Economics of League Football (1997). vi Glossary ABA: The Australian Broadcasting Authority: the broadcasting regulator. ACCC: The Australian Competition and Consumer Commission, responsible for enforcing the Trade Practices Act 1974. Analog transmission: A method of broadcasting based on wave patterns. Asymmetric regulation: Regulation which imposes heavier obligations on, or restricts or prohibits a sector or line of business of, the largest operator. This regulation is often defended as a necessary transitional requirement to foster competition with incumbent telecommunications operators. Basic cable: The first tier of pay TV channels offered with the minimum subscription. Broadband network: Communications network that operates over a wide frequency range and is able to deliver multiple signals. CAS: Conditional Access System: the encryption system for pay TV. Communications satellite: Any earth-orbiting spacecraft that provides com- munication over long distances by reflecting or relaying radio-frequency signals from earth. They receive signals from one ground station, amplify them, and then retransmit them at a different frequency to multiple reception sites such as parabolic dish antennas fixed to houses. Convergence: Term frequently but loosely used to describe the process of merg- ing computing, broadcasting and telecommunications to create one sector of- fering multimedia services. Digital transmission: A transmission of data in encoded binary form as zeroes and ones. Digital signals have a number of advantages over analog signals. They are less prone to distortion and interference, are easily encrypted and compressed and therefore require less bandwidth than analog. Dish: Colloquialism for a parabolic reflector dish antenna (solid or mesh) used to retrieve satellite messages. DTH: Direct to home: the delivery of television services using a receiver dish mounted on the subscriber’s property. Economies of scale: These are present when unit costs fall as output increases. Economies of scope: These are present if the costs associated with producing two products together are less than the combined costs associated with producing each product separately. Facilities-based competition: Direct competition between network infrastruc- ture operators. FCC: Federal Communications Commission: the federal government regulator of the US communications industry. Fibre optics: The transmission of light through fibres or thin rods of glass. Signals are digitally coded into pulses of light and transmitted over great dis- vii tances by slender glass fibres. A fibre cable may contain up to 50 fibre pairs, each pair carrying up to 4000 voice circuits. This uses frequencies thousands of times higher than radio to carry much larger volumes of information. Fixed network: Permanent communications path between two points. Usu- ally refers to wire networks. FTA television: Free-to-air television: broadcast channels which are intended to be received by viewers free of charge at the point of consumption. In Aus- tralia these include the three commercial networks (Channels 7, 9 and 10), and the government-owned ABC and SBS. HFC: Hybrid fibre cable: combination of fibre optic and copper coaxial cables to deliver large amounts of data. Interconnection: The connection of separate telecommunications networks. Market: In trade practices law, a market is defined (under s 4E of the Trade Practices Act 1974) to include goods and services that are substitutable or oth- erwise competitive with one another in response to changes in their relative prices. Market power: The ability to raise prices profitably above the competitive level without being constrained by the actions of competitors or potential competitors. MDS: Multi-point distribution system: a radiocommunications system providing point-to-multipoint line-of-sight transmission using microwave trans- mitters. Operates on the frequencies 2.0–2.4 GHz. Microwave: Wireless transmissions at very high frequency providing telecommunications links (including television distribution) between two places. De- pends on line of sight. Natural monopoly: Industries where the costs of production are minimized by using only one firm. Overbuild: Direct competition between cable networks in the same geographi- cal area.

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