BBC Trust Listed Events Review

REPORT

LISTED EVENTS: MARKET IMPACT POTENTIAL

London, 15th July 2009

1 Executive summary 2 1.1 Introduction 2 1.2 Context: sports rights and TV 2 1.3 Historical impact of Listed Events 3 1.4 Future impact of Listed Events 3 2 Introduction 5

3 The regulation of Listed Events 6 3.1 Summary 6 3.2 Introduction 6 3.3 Legislation 6 3.4 Current UK listed events 7 3.5 Review process 8 4 Overview of sports rights markets 9 4.1 Summary 9 4.2 Introduction 10 4.3 The demand for sport 10 4.4 UK sports rights market 12 4.5 The importance of sport to broadcasters 15 4.6 Characteristics of sports broadcasting markets 18 4.7 How do sports rights holders decide how to sell their rights? 25 5 Evidence of impact to date 31 5.1 Summary 31 5.2 Introduction 31 5.3 Impact on the broadcasting market 32 5.4 Impact on the sports rights market 33 5.5 Conclusion 34 6 Market evolution 36 6.1 Summary 36 6.2 Introduction 36 6.3 Broadcasting market trends 37 6.4 Sports rights market trends 41 6.5 Conclusion: market evolution 46 7 Potential for future impact 47 7.1 Summary 47 7.2 Introduction 47 7.3 Impact of trends in the broadcasting market 47 7.4 Impact of changes to listed events on the broadcasting market 48 7.5 Impact of trends in the sports rights market 49 7.6 Impact of changes to listed events on the sports rights market 49 7.7 Conclusion 50 8 Appendix 51 8.1 New entrants in the UK 51

1 Executive summary

1.1 Introduction The Department of Culture, Media and Sport (DCMS) is currently reviewing its approach to Listed Events, looking at the benefits of a listed events regime, the principles used to determine the list and whether the events on the list should be changed. As part of the review process, DCMS has invited submissions by interested parties. To help inform its submission, the BBC Trust has asked Value Partners to assess whether the current listed events regime has had a significant market impact in the UK and whether it is likely to have one in the future.

Listed events were established in the UK in 1956 and similar lists have since been established across Europe. Their purpose is to ensure that events considered to be of particular national importance (primarily sport) can be watched by as many people as possible for free. In the UK, only qualifying channels with 95% free-to-air reach can exclusively show listed events; currently these channels are BBC One and Two, ITV, Channel 4 and Five. The listed events regime was last reviewed in 1998, when the List was divided into two: a Group A for which live coverage is protected and a Group B where only the highlights are protected for free-to-air broadcast. There are currently ten sports events on the Group A list 1.

This report examines the impact of listed events on the two markets directly affected by listing: the broadcast market and the sports rights market.

1.2 Context: sports rights and TV An assessment of the potential market impact of listed events must be based on an appreciation of the relationship between sport and television.

Sport is one of the most popular TV genres, able to create a unique shared experience for millions of viewers. Football is the most popular sport but a wide range of other sports also attract large audiences. For example, the audience for Manchester United v Chelsea in the 2008 Champions League Final peaked at 14.6 million for ITV and more than 41 million people watched the BBC’s coverage of the 2008 Beijing Olympics. In addition, a large proportion of the population are willing to pay premium prices of over £10 per month to watch live sport on pay-TV. Analysts estimate that over 6m households subscribe to Sky Sports channels 2, out of a total subscriber base of 8.7m Sky households 3.

Consequently, major sports events are highly-prized broadcasting assets and are used by both free and pay broadcasters to draw new viewers and subscribers, and to differentiate themselves from their competitors. As a result, sports rights can be amongst the most expensive programming investments that broadcasters make (e.g. sports rights make up 54% of Sky’s total programming budget 4). Generally, the greater the competition between broadcasters for a particular sports right, the higher the price will be – which means that rights holders try to attract bids from as many broadcasters as possible.

Whether a sports property is more likely to be broadcast on a pay or free channel depends on the nature of the event. Pay-TV particularly values long-running sports properties which extend across large parts of the year and provide the many hours of broadcast coverage required for dedicated sports channels (e.g. live Premier League). By acquiring such rights, they can create a strong subscription proposition. For these sports, free-to-air broadcasters are unlikely to be able to match the value that can be generated through subscriptions with a comparable amount of advertising income. By comparison, for one-off or shorter events, or those that do not happen each year (e.g. the Rugby World Cup), commercial free-to-air broadcasters may

1 Those sports events are the Olympic Games, the FIFA World Cup tournament, FA Cup Final, Scottish FA Cup Final, the Grand National, the Derby, the Wimbledon Tennis Finals, the European Football Championship Finals Tournament, the Rugby League Challenge Cup Final and the Rugby World Cup Final 2 Source: TV Sports Markets 3 Source: Screendigest 4 In 2008, Sky’s total programming costs were £1,713m, of which £929m (54%) were spent on sports (Source: Sky annual report)

be better positioned as they can more easily find the space required in their schedules and can attract one-off, large scale audiences which can be monetised with advertising.

When sports rights holders determine to whom to sell their broadcast rights, maximising rights value is often only one consideration. Other objectives, such as promoting their sport to the widest possible audience or maximising reach to generate sponsorship income, can also be factors. In addition, long standing partnerships can create strong brand or corporate affinities between rights holders and broadcasters, and rights holders may value the production expertise of particular channels. The importance of these factors relative to rights value varies by sports property.

1.3 Historical impact of Listed Events Sky is by far the biggest sports broadcaster in the UK. At the core of its dedicated sports channels are its Premier League rights (since 1992) and a broad range of other rights including rugby union’s Premiership, rugby league’s Super League, domestic Test cricket, US Open Tennis, and Ryder Cup Golf. Two new entrants have tried to enter the pay-TV sports market in the last ten years, but neither ITV Digital (failed in 2002) nor Setanta (failed in 2009) have been successful.

Historically, the listing of events does not appear to have affected the success of Sky. It has built what many regard as the world’s most successful pay-TV business under the existing listed events regime and continued to grow their subscriber base after the last change to listed events in 1998 5. Sky has been able to acquire a critical mass of rights, which means the inability to bid for a limited number of Listed Events does not have a major impact. Indeed, because of this scale and influence, Ofcom is seeking to impose wholesale must-offer regulation on Sky’s sports channels and the European Commission has agreed with the Premier League that it will not sell all its live rights exclusively to one broadcaster (since the 2007/08 season 6).

There is also no evidence that the Listed Events regime was a factor in the failure of new entrants ITV Digital and Setanta. Success in pay-TV sports requires deep financial resources to bid for a broad portfolio of exclusive rights while a customer base is being built, experience in knowing how to bid and monetise those rights and the ability to secure favourable distribution deals. Event listing did not stop ITV Digital or Setanta from acquiring a broad portfolio of rights. If anything, listing events may have helped these new entrants by ensuring Sky could not create an even more powerful sporting proposition.

By comparison, the listing of events has probably decreased value for some sports rights holders; English cricket, for example, has achieved much higher prices since delisting by selling its rights to Sky. However, it is impossible to quantify what income has been lost to rights holders due to listing, given the other factors that influence sports rights valuations; it will depend on the nature of the event and the commercial structure of the sport (e.g. events with more sponsorship are less likely to have been affected). It is possible that an initial increase in rights fees due to delisting may prove temporary if a sports property were to lose its relevance to a free-to-air (FTA) audience and failed to create any competition for its rights within the pay-TV sector, but this remains to be seen in practice.

1.4 Future impact of Listed Events Both the broadcast and the sports rights markets are changing, with consequent implications for the impact of listing events.

In the broadcast market, Digital Switch Over (DSO) will increase the number of qualifying channels with 95% reach and will give public service broadcasters (PSBs) more capacity to show listed events across their digital portfolio of free-to-air channels. Audience fragmentation, increased use of personal video recorders and, eventually, on-demand will increase the value of “appointment to view” programming such as sport which attract large audiences who watch the show live. For PSBs with a commitment to sport, sports rights are likely

5 At the last change in listing in 1998, when the European Football Championship Finals Tournament, Rugby League Challenge Cup Final and Rugby World Cup Final were added to the A list, and Test match cricket and the Commonwealth Games were removed 6 The Premier League sells its live rights in six separate packages, with no broadcaster allowed to win more than five packages.

to take a growing share of their increasingly pressurised programme budgets. As a result, there is likely to be greater competition amongst FTA broadcasters for listed events which may well support the level of listed events rights fees in the future.

In the sports rights market, falling production costs and innovations in production technology are enabling sports rights holders to create more hours from a single event. As an example, the Olympics Games more than doubled the number of hours produced between Seoul (1988) and Beijing (2008), while the Winter Olympics saw a threefold increase between 1992 and 2006 7. Regulatory pressure and competitive dynamics may increasingly drive rights holders to break their rights into smaller packages targeted at both FTA and pay- TV to increase competition.

In the future, as historically, Listed Events are unlikely to have a significant impact on the dynamics of the broadcast market. Adding new events to the list is unlikely to change this, unless the most valuable properties are listed or a substantial volume of other important events is listed. The Premier League is the most valuable property and any significant intervention here would be likely to have an impact 8. The listing of a significant number of second-tier (in terms of value) events would, ultimately, damage Sky’s proposition but such a substantial increase in listings appears very unlikely to occur. A major increase in the number of listed events would affect smaller sports channels (e.g. new entrants) before it had an impact on Sky, particularly if the newly-listed events were those most suitable for pay-TV scheduling (i.e. frequent and long- running).Conversely, it is possible that significant delisting could also harm a new entrant; if Sky were able to acquire events such as the FIFA World Cup or the Olympic Games, the scale of the challenge facing a new entrant to attract subscribers might seem much greater.

The listing of events is likely to continue to have some adverse impact on the revenues of rights holders because they are unable to maximise competition among pay-TV and free-to-air (FTA) broadcasters. However, there are so many different factors which affect price, it is almost impossible to quantify the specific impact of listing. Digital Switch Over (DSO) raises the prospect of increased competition between a larger number of qualifying broadcasters, which may partially mitigate this impact.

7 Source: IOC, EBU 8 Ofcom state in the pay-TV market review that “FAPL is the most important competition” but that “Sky Sports broadcasts a range of valuable content which is valued by subscribers”. (Section 4.80-2) Ofcom come to the conclusion that “in order to materially undermine Sky’s wholesale position Sky would need to lose the majority of FAPL rights (Section 5.47) (Source: Ofcom Pay TV phase three document ).

2 Introduction

Major sporting events have great social and cultural significance. The most important of them are protected under legislation, as “Listed events” 9. Listed events are selected on the basis of their special significance for the UK or the nations. They are unique in their ability to bring the nation together and promote a sense of national identity. The UK safeguards these events so that they can be seen by as many people as possible, to maximise their positive effects on society. These listed events have to be broadcast by qualifying services, which currently comprise BBC 1, BBC 2, ITV, Channel 4 and Five. Pay-TV channels or lower-reach FTA channels can only broadcast these events exclusively with Ofcom’s permission. Currently the UK list includes twenty sports events, ranging from single races (such as the Derby, which lasts only a few minutes) to final matches of a larger competition (such as the FA Cup Final) to entire tournaments (such as the European Football Championship Finals) comprising hundreds of hours of sport over several weeks.

The listing of events effectively reduces the number of broadcasters who may acquire the rights and, through this reduction in competition, the price of the rights may be lowered – with consequences for the sporting body that owns the rights. It can also lead to a potential distortion in the broadcast market by creating a distinction between those broadcasters who can and cannot acquire and show some of the UK’s most popular events. However, whether, and in what cases, such impact might arise in practice, and the impact on market values, are less clear and subject to much debate.

The Department of Culture, Media and Sport (DCMS) is currently reviewing which events should be listed and has invited submissions by interested parties. When considering changes to listed events, it is important to understand the potential for changes to have significant market impact as part of the debate on the public value case. The BBC Trust has therefore asked Value Partners to prepare a report to aid understanding of the market impact consequences of restricting the types of broadcasters who can acquire and broadcast some sports rights.

There are potential consequences for two connected markets: the UK broadcasting market and the UK sports rights market. The organisations that would, primarily, be adversely affected by such impacts would be non- qualifying broadcasters and sports rights holders respectively.

This report therefore looks at the potential impact of listed events on these two markets in a number of ways: has there been significant market impact historically, or at present, and, anticipating the way in which both markets are evolving, are there likely to be impacts in the future? The report’s is structured as follows:

• Chapter 3 considers the background to listed events

• Chapter 4 reviews the dynamics in the sports rights market to set the context for the listing of sports events, looking at how sports rights are valued, why broadcasters buy sports and what the benefits of selling to different broadcasters are for sports rights holders

• Chapter 5 considers what the market impact of “listing” events has been historically on sports rights holders and broadcasters

• Chapter 6 looks at the trends in the broadcasting and sports rights markets since the last review in 1998, eleven year ago

• Chapter 7 concludes by looking at the likelihood of market impacts from listed events in the future

• Chapter 8 is an appendix looking at the success of new entrants in the UK market

9 Listed events need not be sports-related, and other European countries do list non-sporting events, such as the Vienna Opera Ball n Austria

3 The regulation of Listed Events

3.1 Summary • Listed events were established in the UK in 1956 and similar lists been established since across Europe. The aim of listing is to ensure that sports events of national importance are available to be watched by as many people as possible, for free

• The listed events regime was last reviewed in 1998, when the List was divided into two: a Group A for which live coverage is protected and a Group B where only the highlights are protected, for free-to-air broadcast. There are currently ten sports events on the Group A list

• Only qualifying channels which reach 95% of households free-to-air can show listed events; currently these channels are BBC One and Two, ITV, Channel 4 and Five

• The listed events regime is now being reviewed – with the review panel looking at the benefits of having a listed events regime at all, what principles should be used to determine it, and whether the events on the list should be changed

3.2 Introduction

The history of “listing” sports events has evolved over fifty years in the UK. Currently, certain major events are listed by the Secretary of State under the Broadcasting Act of 1996 and safeguarded for free-to-air (FTA) television. As such, these rights cannot be sold exclusively to pay-TV channels, where access would be limited to households willing and able to pay a ‘premium’ sports subscription. This chapter looks at the legislation enabling this regime, the sports that are listed and the review process.

3.3 Legislation

3.3.1 EU law

The concept of listing major events is not unique to the UK. The European Union (EU) allows Member States to create listed events under the Audio-Visual Media Services Directive to “ensure that broadcasters under [their] jurisdiction do not broadcast on an exclusive basis events… of major importance for society” 10 .

Any event can be listed, not just sporting events, and a number of European countries also list cultural events – for example, Austria lists the Vienna Philharmonic Orchestra’s New Year Concert 11 . Listing can be applied to full live coverage or “deferred coverage”, i.e. highlights and near-live coverage. The choice of the creation of a list, the events on it, and the reach a broadcaster must have to bid for a listed event is at the discretion of each Member State. The UK has the highest required reach, at 95%. Denmark and Italy require only 90% reach and Germany has the lowest reach requirement, at 67% of households.

Once a list has been created, it must be submitted to the European Commission (EC). The EC has up to three months to raise any issues it has with the list.

3.3.2 UK law

In the UK, the law which allows for listed events is the Broadcasting Act (1996). This law defines two groups of broadcasters: qualifying broadcasters, whose channels are available to at least 95% of the population and do

10 Audiovisual Media Services Directive, Article 3j. Source: DCMS Free-to-air review consultation, Annex A 11 Source: DCMS Free-to-air Events Review Consultation , Appendix 3

not require any additional payment over the normal licence fee, and non-qualifying broadcasters (i.e. any other broadcaster).

The Act says that any listed event must be shown by both of these types of broadcaster 12 , unless Ofcom gives its consent. In order to show a listed event exclusively, both “qualifying” and “non-qualifying” broadcasters must ask permission from Ofcom. As an example, the BBC applied for permission in 2005 to show Wimbledon exclusively live from 2005-09 on BBC1 or BBC 2. Ofcom typically permits FTA channels to show listed events live if other broadcasters have had the chance to bid for the events at a fair price, as with Wimbledon.

The Communications Act (2003) enshrined two different types of Listed Event in legislation, an A list and a B list, created by the 1998 review. The live showing of events on the A list must be offered to both “qualifying” and “non-qualifying” broadcasters. Any broadcaster can show an event on the B list exclusively as long as a qualifying broadcaster has the highlight rights 13 . Thus for B-list events, the live rights can be sold directly to a pay-TV broadcaster as long as a qualifying broadcaster has bought the highlights.

This law is enforced by Ofcom under the Code of Conduct on Sports and Other Listed and Designated Events , published in 2002. This defines Ofcom’s interpretation of, and approach to, the laws, including Ofcom’s view on what a “live” event is and when Ofcom will allow broadcasters to show listed events exclusively. To allow a broadcaster exclusively to show a live event, Ofcom requires that other broadcasters must have a “genuine opportunity to acquire the rights on fair and reasonable terms” 14 and been given “a reasonable time to do so”. “Fair and reasonable” are not precisely defined in terms of cost or duration respectively but Ofcom provides a list of criteria which it uses to determine whether other broadcasters have been offered a genuine opportunity.

3.4 Current UK listed events

3.4.1 Listed events

The UK has had listed events since 1956, when a list was agreed between the BBC and the Independent Television Authority. Initially, listed events were limited to the FA Cup Final, Wimbledon, cricket Test Matches, the Derby, the Grand National, the Boat Race, the Olympics and Commonwealth Games (when it is held in the UK). This list has been extended in subsequent reviews. At the latest review, in 1998, the distinction between a “Group A” and a “Group B” list was added. Of the events already protected for live viewing, Test match cricket and the Commonwealth games were downgraded to Group B events, whilst the European Football Championship Finals Tournament, Rugby League Challenge Cup final and Rugby World Cup final, were added to the Group A list.

The current list of protected events is: Event Sport Group A Olympic Games Various FIFA World Cup Tournament Football

12 Broadcasting Act (1996) states in section 101 that “a television programme provider providing a service falling within either of the categories set out in subsection (1) of section 98 (“the first service”) for reception in the United Kingdom or in any area of the United Kingdom shall not, without the previous consent of Ofcom, include in that service live coverage of the whole or any part of a listed event unless (a) another person, who is providing a service falling within the other category set out in that subsection (“the second service”), has acquired the right to include in the second service live coverage of the whole of the event or of that part of the event and (b) the area for which the second service is provided consists of or includes the whole, or substantially the whole, of the area for which the first service is provided” 13 The Act states that Ofcom will automatically approve a broadcaster in one category (either A or B) showing the live events as long as a broadcaster in the other category has the highlight rights. Thus technically, in order for an FTA broadcaster to show the event live, they require permission from Ofcom unless a non-qualifying broadcaster has the highlight rights. 14 Ofcom Code on Sports and other listed and designated events , Section 1.14

Event Sport FA Cup Final Football Scottish FA Cup Final 15 Football The Grand National Horseracing The Derby Horseracing The Wimbledon Tennis Finals Tennis The European Football Championship Finals Tournament Football The Rugby League Challenge Cup Final Rugby League The Rugby World Cup Final Rugby Union Group B Cricket Test Matches played in England Cricket Non-finals play in Wimbledon Tennis All other matches in the Rugby World Cup Finals Tournament Rugby Union Six Nations Rugby Tournament matches involving Home Countries Rugby Union The Commonwealth Games Various The World Athletics Championship Athletics The Cricket World Cup – the Finals, Semi-finals and Matches involving Home Cricket Nations teams The Ryder Cup Golf The Open Golf Championship Golf

3.4.2 Qualifying broadcasters

Currently, the qualifying broadcasters in the UK are BBC1 and BBC2, ITV1, Channel 4 and Five. All of these are available free-to-air. Five was the last to be added, in early 2008, once it could prove that it reached over 95% of the population 16 . Other broadcasters could be added to this list by Ofcom once they reach 95% of the population, as long as they are free. This is likely to be the case for more FTA channels on Digital Terrestrial Television as digital switch-over (DSO) comes closer.

3.5 Review process

Since the list of events was created in 1956, the events and the principle underlying the list have been periodically reviewed (in 1984, 1989, 1991 and 1998). The latest review was announced by Andy Burnham, then Secretary of State for Culture, Media and Sport, in a speech to the Royal Television Society in September 2008. He stated that its aims were to “weigh the public interest with the demands and discipline of the market and the implications for the funding and development of individual sports” 17 .

On 10 th December 2008, David Davies was appointed as the Chairman of the Advisory Panel. The terms of reference of the Panel are to review: the principle of having a list; the criteria against which events may be listed and the content of any list.

The Advisory Panel released a “Free-to-air Events Review Consultation” in April 2009, inviting comments from interested parties before the 3 rd July 2009. The panel will report to the Secretary of State in the second half of 2009, who will draft provisional conclusions and then consult with the broadcasting authorities and affected rights holders, in line with the requirements of the 1996 Broadcasting Act, before announcing a final list.

15 This is a listed event in Scotland only 16 Ofcom website, http://www.ofcom.org.uk/tv/ifi/channel5/ . Five currently reaches 96% of the population. This includes those who receive Five via cable. Five is regarded as a “free” service on cable, even though cable subscribers have to pay for at least a basic subscription; that is, the charge that cable subscribers pay is not for reception of the Five service. 17 Andy Burnham's speech to the Royal Television Society, 26 September 2008, http://www.culture.gov.uk/reference_library/minister_speeches/5483.aspx/

4 Overview of sports rights markets

4.1 Summary • Sport is one of the most popular television genres, able to create a unique shared experience for millions of viewers. Football is the most popular but a wide range of other sports are also attract large audiences. For example, the audience for Manchester United v Chelsea in the 2008 Champions League final peaked at 14.6 million for ITV and more than 41 million people watched the BBC’s coverage of the 2008 Beijing Olympics. In addition, a large proportion of the population are willing to pay over £10 per month to watch live sport. Analysts estimate that over 6m households subscribe to Sky Sports channels 18 19 .

• Major sports events are highly-prized broadcasting assets and are used by both free and pay broadcasters to attract new viewers and subscribers, and to differentiate themselves from competitors. As a result, sports rights can be amongst the most expensive programming investments that broadcasters make (e.g. sports rights make up 54% of Sky’s total programming budget 20 ). The greater the competition between broadcasters for a sports right, the higher the price – which means rights holders try to attract bids from as many broadcasters as possible.

• The nature of a sports event will impact on whether it is more attractive to a pay or free channel. Pay-TV particularly values long-running sports properties, which extend across large parts of the year and provide many hours of coverage (e.g. live Premier League). These rights help create a strong subscription proposition. For these sports, FTA broadcasters are unlikely to be able to match the value that can be generated through subscriptions with a comparable amount of advertising income. By comparison, for one-off or shorter events, or those that do not happen each year (e.g. the Rugby World Cup), commercial FTA broadcasters may be better positioned as they can more easily find the limited space required in their schedules and can attract one-off, large scale audiences which can be monetised with advertising.

• The critical mass of a large subscriber base allows a sports broadcaster like Sky to consolidate a large volume of rights. Although this does not prevent new channels entering, it does make it more difficult for them to survive in the market unless they have deep pockets and the ability to secure favourable carriage or platform access deals. To become viable, they will require a strong portfolio, consisting of a number of key sports events with supporting content around it.

• This question of whether Sky is able to exercise undue market power has been considered by both national and European regulators. As a result, Ofcom is seeking to impose wholesale must- offer regulation on Sky and the EC has agreed with the Premier League that it must sell its live rights in six separate packages from 2007/08 onwards, with no broadcaster allowed to win more than five packages.

• When sports rights holders determine to whom to sell their broadcast rights, maximising rights value is often only one consideration. Other objectives, such as promoting their sport to the widest possible audience or maximising reach to generate sponsorship income, can also be factors. In addition, long standing partnerships can create strong brand and corporate affinities between rights holders and broadcasters, and rights holders may value the production expertise of particular channels. The importance of these factors relative to rights value varies by sports property.

18 Source: TV Sports Markets 19 Source: Screendigest 20 In 2008, Sky’s total programming costs were £1,713m, of which £929m (54%) were spent on sports (Source: Sky annual report)

4.2 Introduction

This chapter reviews dynamics in the sports rights market to set the context for the listing of sports events. It looks at the demand for sport in the UK is, how sports rights are valued, why broadcasters license (i.e. acquire) sports rights, and what the benefits of selling to different broadcasters are for sports rights holders.

The report focuses on free-to-air and on subscription services for pay-TV and not on pay-per-view (PPV) as a means of selling content to customers. While there are some examples of PPV being used for single sports events (notably boxing), PPV is not considered a particularly effective means of creating value from sport.

4.3 The demand for sport

There is a widespread interest in watching sport in the UK. Sport is the most important TV genre for the vast majority of people who say good content is a “must have” on TV 21 . Sporting events rank in the top 10 rated programmes each year (along with soap operas and the finals of reality TV shows 22 ). As examples, the audience for Manchester United v Chelsea in the 2008 Champions League final peaked at 14.6 million for ITV and more than 41 million people watched the BBC’s 2008 Beijing Olympics coverage. Ofcom’s willingness to pay analysis suggests that sports are more highly valued than movies 23 and that consumers taking the “basic plus sports” package are less price-sensitive than the “basic plus movies” package. 24

Consumers demand sport in different ways. Fans of a particular team or sport are likely to be willing to pay more to see their chosen team or competition. Other consumers may not have a strong preference for a particular sport or sport in general but will participate in watching big ticket events such as the Olympics or a cup final. However, for all consumers TV is the most important method of accessing premium sport; Ipsos MORI research indicates that 75% of people watch sport on TV compared to 48% who listen on radio and 36% on the internet 25 .

BBC / Ipsos MORI research has shown that almost three-quarters of all adults are interested in sport 26 . This is backed up by Ofcom survey data suggesting that over 60% of UK adults “have an interest in sport” 27 . The Ipsos MORI research has divided those divided into two groups, “Sports Fans” and “Main Eventers”, a division which is backed up by the Ofcom research’s division into those who “are passionate about sport” or “follow sport closely” against those who “have an interest in sport but did not follow it closely”.. “Sports fans” are adults who make an effort to watch, listen to, or read about sport most days of the week, whilst “main eventers” only follow events in which they are specifically interested.

21 Ofcom market research in December 2007 showed that 87% of Free-to-air and 88% of Pay_TV households surveyed said that content was a must have element for their TV service. Of this, 12% of Free-to-air viewers and 25% of pay-TV subscribers said that sport was the must have genre on TV, against 10% and 11% respectively who said that children’s TV was the must have genre (Source: Ofcom consumer research on pay TV, Annex 10 to second pay TV market consultation ) 22 Source: Eurodata, TV Sports Marketts 23 Source: Ofcom, Annex 10 to the pay TV market investigation consultation , Section 8.11 24 Source: Ofcom, Annex 10 to the pay TV market investigation consultation , Section 8.12 25 Source: BBC Sport Listed Events, May 2009, Ipsos MORI, 7th-12th May 2009, 2,543 UK adults aged 16+ 26 Source: BBC Sport Listed Events, May 2009, Ipsos MORI, 7th-12th May 2009, 2,543 UK adults aged 16+ 27 Ofcom market research in 2007 showed that, of adults (15+) who were the main decider for purchasing TV services in their household, 10% were “passionate about sport”, 17% “followed sport closely”, 35% “had an interest in sport but did not follow it closely” and 38% “had no interest in sport” (Source: Ofcom consumer research on pay TV, Annex 10 to second pay TV market consultation )

Exhibit 1: Segmentation of sports audience

Ipsos MORI survey on UK interest in sport Ofcom survey on UK interest in sport

Interested in sport Not interested in Passion sport ate about Rejector Have no sport s interest 11% Follow 27% Sports in sport sport fans 31% 39% closely 19%

Main Have an eventers interest 34% in sport 39%

Source: Ipsos MORI, 7th-12th May 2009, 2,543 UK adults aged 16+, Ofcom Annex 10 to second pay TV market consultation

In the UK the sport that most viewers are interested in is football; 40% of all adults 28 said that they were interested in football, more than 10% more than the next closest sports. For subscription services the Premier League is key in driving take up (in this case to Sky Sports).

Exhibit 2: Most important sports in subscribing to Sky Sports

Premier League 70% UEFA Champions League 45% FA Cup 26%

Test match cricket 15% Football League 10%

WWE Wrestling 10% Football Six Nations 10% All other sports Scottish / European leagues 6%

Note: Figure shown is sum of first, second and third “most important” responses Source: Ofcom willingness to pay omnibus research, fieldwork April-July 2008

However, after football, viewers are interested in a broad range of different sporting properties. Fewer than one-quarter of Sky Sports subscribers said that having any one non-football sport in their package was “extremely important” (marked as 7 on 1-7 scale).

28 In 2008, 40% of a base of adults 15+ said they were interested in sport, more than 10% more than the 29.95 who said they were interested in swimming (Source: Mintel Sports and the media, Leisure Intelligence , Feb 2009)

Exhibit 3: Importance of sports within a Sky Sports subscription

63% 57% 55% 54% Football All other sports 35% 24% 21% 21% 19% 19% 17% Union Rugby league Premier League FA Cup FA Football UEFA Oneday England League int'ls / WC / int'ls RyderCup Wimbledon TestMatch Champtions Motorsports Int'l matches Int'l

Note: % of Sky Sports subscribers ranking given sport as “extremely important” to have in subscription Source: Ofcom pay TV research phase 3

More than one-third of viewers say that interest in a “range of sports and teams” rather than a specific sport or team is their reason for watching sports. This is supported by Ofcom data showing that 47% of pay-TV subscribers find both football and at least one of cricket, golf and rugby “very important” to have as a part of their package 29 , and that “subscribers tend to value two or more sports” 30 . This suggests that the best way to attract an audience is to focus on top-flight football and a broad range of other sports. Sky offers exactly this, with Sky Sports showing Premier League and a portfolio of other sport.

Exhibit 4: Main reasons for watching sports on TV

Range of sports and teams 37%

Specific sport or sports 34%

Specific team's games 29%

Specific competition or event 19%

Interactive services 2%

Source: Ofcom pay TV research phase 3

4.4 UK sports rights market

Most broadcasters in the UK broadcast at least some sports. The biggest sports broadcasters are, in pay-TV, Sky, and in FTA, the BBC. The other major sports pay-TV broadcaster, Setanta 31 , has gone into administration. Its Premier League rights have been re-sold to ESPN, which already broadcasts ESPN Classic

29 Source: Ofcom Pay TV phase three document , Section 4.97 30 Source: Ofcom Pay TV phase three document , Section 4.114-5 31 Setanta is discussed in more detail in the Appendix, in section 9.1, New entrants in the UK

in the UK. In FTA, ITV has significant football rights, particularly Champions League and England home internationals.

Sports are available on three platforms; terrestrial (either analogue or digital), satellite, or cable. Free-to-air broadcasters are available on all three platforms, whilst Sky Sports is available only on satellite and cable. Setanta was available across all three platforms, and ESPN have indicated that their new subscription channel showing Premier League rights will be available across a number of platforms 32 .

32 Source: BroadbandTVnews, http://www.broadbandtvnews.com/2009/06/22/espn-secures-premier-league-rights/

Exhibit 5: Main channels broadcasting sport, 2008/09

Free-to-air Pay-TV BBC Athletics • World and European champs. • London Marathon Cricket • Domestic • Domestic • Indian Test Tests Premier highlights • Domestic League leagues/ cups

Football • World Cup • Europa • Premier • Premier (live) • Euro 2008 League League League • Home • England • Football • England nations nat’l national League home team home matches matches matches • FA Cup • FA Cup • Football • World Cup • Champions League away League • League Cup qualifiers • Europa • Scottish PL League • Europa League Football • Premier (h’lights) League Golf • British Open • Ryder Cup • US PGA tour • US Masters • US Open • Ryder Cup • US PGA highlights

Rugby • World Cup League • Super League (1) Rugby • Six Nations • • England • Magners Union • Anglo-Welsh Autumn int’ls League Cup • Premiership • Challenge Cup Tennis • Wimbledon • US Open • Australian • ATP Masters and French Open Other • Olympics • Tour de • Horseracing • NBA • Formula One France • NHL • Superbowl • NFL • Grand National • Ascot • Derby

Notes: (1) ITV showed the Rugby World Cup 2007 Source: TV Sports Markets, Value Partners analysis

A number of other channels in the UK also broadcast sport. These include:

• Attheraces and RacingUK, two dedicated channels which exclusively show live horse racing

• British Eurosport and British Eurosport 2, which are included in Sky’s “News and Events” package. Sports shown live include the French and Australian Tennis Opens, World Superbikes and Le Mans 24 hour

• ESPN Classic, which shows archive sports, including vintage Match of the Day, FA Cup and England matches, vintage Rugby Union and cricket coverage. ESPN has also acquired the two Premier League packages that Setanta has previously for the remainder of the 2009/10 season and their one three-year package from 2010/11 to 2012/13. ESPN has stated its intention to launch a new subscription channel on Sky and other distribution platforms to broadcast the Premier League and other sports 33 .

• Extreme Sport, which shows “extreme sports” such as surfing, snowboarding, and BMX biking, as well as associated lifestyle programming

• A number of top football clubs have their own TV channels, including Manchester United (MUTV), Chelsea (Chelsea TV) and Real Madrid (Real Madrid TV), showing their own first-team matches (generally non-live), reserve matches, archive matches, magazine-style programming and club news

4.5 The importance of sport to broadcasters

4.5.1 Overview: the value of sport

Sports rights are very valuable. The top ten UK sports rights properties are together worth over £1.3bn per season 34 , with the Premier League accounting for over half of that value (£669m per year; six times more than the second most valuable property, the FIFA World Cup 2010 35 , and twelve times more than all English cricket matches). Football accounts for 85% of the total value of the top ten sports events. The English Premier League alone will cost Sky on average £438m p.a. over the next three years 36 , 47% of Sky’s total sports rights programming budget 37 . Sport has a broad base of interest in the UK, with the BBC/ Ipsos MORI data in section 4.3 showing that almost three-quarters of all UK adults are interested in sport 38 , and that 75% of sports followers watch sport on TV.

Access to substantial amounts of premium sports is one of the main reasons why people subscribe to pay-TV and is critical to the success of pay-TV players such as Sky 39 . Premium subscribers pay over £200 per year for both Sky Sports channels 40 in addition to their basic pay-TV subscriptions 41 . Value Partners estimates that Sky’s premium sports channels account for over one quarter of Sky’s total retail subscription revenues of £3.8m in 2008 42 . Pay-TV is able to monetise sport very effectively through the sale of long-running subscriptions.

33 Source: http://www.guardian.co.uk/media/2009/jun/22/espn-wins-premier-league-rights 34 Source: Ofcom, Annex 10 to the pay TV market investigation consultation 35 The FIFA World Cup’s right sold for a total of £110m per full property; the entirety of English Cricket, including Tests in England, One Day Internationals and Twenty20 internationals, sold for £52m 36 Source: TV Sports Markets 37 Sky Sports channels’ total programming costs were £929m in 2008. The cost of Premier League rights was £438 per annum on average over the next three years, 47% of total costs 38 Source: BBC Sport Listed Events, May 2009, Ipsos MORI, 7th-12th May 2009, 2,543 UK adults aged 16+ 39 Ofcom have commented in the Pay-TV market review that “sports and films are the genres which stand out as the most valued genres by consumers, and also having a high degree of exclusivity to pay-TV”, and “the statements Sky in particular has made both in public and in private illustrate how important premium content, and in particular premium sports content, is in assembling a pay-TV business” (Source: Ofcom, Pay TV phase three document ) 40 Based on a subscriber who takes 1 – 6 entertainment packs adding Sky Sports to their package (Source: Sky Sports website) 41 Source: Sky Sports website 42 Sky’s retail subscription revenues in 2008 were £3.8bn (Source: Sky annual report). The Sky Sports package costs £10-11 / month for either Sky Sports 1 or Sky Sports 2 and £19 / month for both (Source: Sky Website), and analysts have estimated that Sky has ~ 6 million subscribers to Sky sports (Source: TV Sports Markets). Ofcom ‘s research has show that 41% of subscribers take the Sky Sports Mix against 5% who take only Sky Sports 1 and 1% who take only Sky Sports 2 (Source: Ofcom Annex 10 to the second pay TV market investigation ).

Public service broadcasters (PSBs) also attach great significance to sport, for its potential to deliver high reach and viewing share. For example, England v Sweden in the 2006 football World Cup, shown on ITV, had 18.5m viewers. However, as sports rights have increased in value 43 , PSBs have found it increasingly difficult to afford attractive sports properties due to competition from pay-TV. Over the last decade, total TV Net Advertising Revenues have grown slowly 44 , and the amount of advertising revenue going to the PSBs has fallen. As a result, Channel 4 has lost domestic Test cricket, outbid by Sky, and ITV has given up Formula One rights to free up enough cash to win the “1 st choice Wednesday match” package from the 09/10 – 11/12 Champions League rights auction. The overall amount of sport shown in daytime on PSBs has fallen from 2,193 hours in 2002 to 1,687 in 2007 45 , an average year-on-year decline of 5% 46 .

As an indication of the difference in financial power to acquire sport, ITV’s total revenues in 2008 were £2bn, just over twice what Sky Sports alone spent on programming (mainly sports rights fees).

Sport generates value for commercial FTA and pay-TV broadcasters in different ways. For FTA broadcasters, sports properties can generate advertising revenues by attracting millions of viewers, particularly in valuable, hard-to-reach demographics like older, more affluent men. Sport can also be used to raise the profile of the channel for viewers, as part of a general marketing strategy. Sport is generally considered to be able to create “strategic value” in this way, which is one reason broadcasters pay so much to win the rights.

Sport has been a significant driver of pay-TV subscription. In order to view sports, fans have typically had to subscribe not only to sports channels but also to a platform (either cable or satellite) with a range of other channels. They are very valuable customers for a pay platform to have. As an example, the majority of Sky’s revenues (76% in 2008 47 ) are from subscription 48 , and over two-thirds of Sky subscribers take a Sky sports package 49 .

For pay-TV, particularly important are long-running tournaments which have one to two events per week, cover most of the year, and build narratives that ensure subscribers renew their subscriptions 50 . The exhibit below shows how different sporting events perform against these criteria (a year-round schedule of events, and a large number of hours per week). The events in the top right quadrant are best suited to pay-TV whilst those in the bottom left are one-offs (e.g. the Boat Race) that are less likely to drive subscriptions.

This implies that 87% of those who take any sports package take both. Assuming no net churn amongst subscribers in any given year, total premium sport TV revenues are £1.3m, 34% of total revenues 43 From 1997-2006 a basket of selected sports rights has risen at 15.2% CAGR (Source: Ofcom, Summary of UK sports rights Annex 10 to pay TV market investigation consultation ) 44 Total TV NAR 1997-2006 rose from £2,560m to in 1997 (Source: Zenith) to £3,469 in 2006 (Source: Ofcom Communications market 2008 ) , a CAGR (average growth rate) of 3.4% 45 Source Ofcom Communications Market 2008 46 i.e. a Constant Annual Growth Rate of -5% 47 Source: Sky Annual Report, Value Partners analysis 48 Sky’s packages cost from £16.50 to £46 per month for the Sky World package, including all six variety packs, Sky Movies and Sky Sports. (Source: Sky website), http://www.sky.com/portal/site/skycom/skyproducts/skytv/pricesandpackages/tvpackages 49 Sky currently has 8.7m subscribers (Source: Screendigest), and over 6m subscribers to Sky Sports (Source: TV Sports Markets) 50 This is in line with Ofcom’s comments that “regularity [of a sports event] is particularly important for building and sustaining a subscription pay-TV offering” (Source: Ofcom Pay TV phase three document )

Exhibit 6: Illustrative suitability of sports for broadcasters

Horse racing has an ideal profile but lacks broad public support

Full year PGA Tour Multi-track horse racing

PDC Darts Formula One Premier League football

Rugby Super League

Calendar Pay TV likely to be a better duration economic model for (average exploitation weeks per year)

Cricket Test match series

Rugby Six Nations FTA likely to have a better economic model Wimbledon

Olympics Part of one The Boat Race day London Marathon

Many Few Hours of coverage (per active week) Potentially attractive to both free and pay-TV Source: TV Sports Markets, Value Partners analysis

Pay-TV broadcasters do not need to win every sporting event. In theory, once they have a schedule that matches consumer demand 51 , i.e. is balanced across the year, across the week and comprises a broad mix of different sports to maintain subscription levels, additional rights only generate incremental value to the platform if they deliver enough new subscribers to offset their cost and/or they allow the platform to increase the subscription rates. Of course, the possibility also exists that depriving an actual or potential rival of a particular sport event may represent a strong strategic rationale for acquiring that event. Also, a broadcaster may try to push up the amount that a rival has to pay for an event by appearing to be bidding strongly to win it

51 See section 4.3, the consumer demand for sport, for more details

itself. A broadcaster may hope to force a rival to pay so much for one event that their ability to bid for other events is weakened, thereby reducing the price the first broadcaster will have to pay for them.

4.5.2 How are prices for sports rights determined?

It is worth understanding how the price of exclusive sports rights is, generally, determined by the market. A broadcaster will value the rights at net incremental revenues plus “strategic value”, as noted above, and will be willing to bid up to that amount to secure the rights.

A broadcaster will also typically try to estimate how highly other bidders are likely to value the rights in question. In a competitive market, a bidder will have to bid up to their full valuation for the rights to ensure that they win it from their rivals. However, where markets are less competitive, and one broadcaster values the rights significantly more than others, it may well bid under their total value, just above the value that they think the broadcaster with the next highest valuation will pay for it. In other words, in less competitive markets, the broadcaster does not bid its maximum value, but just enough to beat the next best bid. This will, however, increase the risk that the it loses the rights to a rival broadcaster. Because the value of sports rights is set by auction, the price in this case is determined by the competition between the bidders.

4.6 Characteristics of sports broadcasting markets

4.6.1 Pay-TV values sports highly, using it to drive subscriptions

a) Major sports events drive consumer’s purchasing decisions

Major sporting properties are one of the main reasons why consumers choose to subscribe to pay-TV. Where important sports are available on FTA, consumers are less likely to subscribe to pay-TV. Markets where pay- TV has greatest penetration, such as the UK, France and Italy, are those where live matches are available only on pay-TV and FTA has only limited highlights package. Where at least one top-flight domestic football match is shown on FTA television or there is the tradition of a strong highlights package, as in Germany, premium pay-TV has been less successful.

Exhibit 7: European pay-TV penetration & football rights situation

Pay-TV penetration FTA football rights

• All live Premier League matches shown on pay-TV (Sky / UK 50% Setanta) • Highlights later that evening on FTA (BBC)

• All live matches and highlights shown on pay (Canal+ France 37% /Orange IPTV) • Canal+ will show some highlights unscrambled after complaints about lack of FTA Ligue 1 coverage • Live matches shared between Mediaset, Telecom Italia and Italy 26% Sky Italia (pay-TV operators) • Highlights shown by Mediaset at 6pm Sunday, but Rai FTA provides a real-time updates program on Sunday afternoon

• La Liga rights sold to primarily to Sogecable (pay-TV) Spain 25% • By law, at least one live match per week must be shown on FTA TV - currently shown by La Sexta.

• Football league Eredivisie launched its own live channel for Holland 19% 2008/09+ after rejecting broadcasters’ offers. It is obliged to broadcast a FTA highlights show of at least 40 minutes between 8 and 9pm on Sunday and after every match

• Complex situation with rights currently owned by Premiere Germany 16% • Strong Bundesliga highlights package broadcast by ARD at 6.30pm, 2 hrs after live coverage

Source: Screendigest, TV Sports Markets, RapidTV, Value Partners analysis.

Pay-TV penetration is not just a function of sports. For example, in both Germany and the Netherlands, extensive basic “utility” cable television, a basic cable package included in the rental bills for apartments, has made the benefits of upgrading to premium pay-TV less apparent. There are also cultural factors based around the interest in football. Even with these caveats, though, it can be seen that whether pay-TV exclusively shows live football is related to the overall penetration of pay-TV in the country. The German example also illustrates that even a free-to-air highlights packages can lessen the appeal of live football, if those highlights packages have to be shown a short time after the live matches themselves. 52 b) A portfolio of smaller sports rights also creates value by providing a breadth of sports coverage

Pay-TV providers require a volume of events to create a full schedule for their pay-TV channels. This is important because consumers expect their pay-TV package to provide good value for money on a month-by- month basis. As explored in the consumer demand section 53 above, one of the main reasons for viewing sport on TV (reported by over one-third of sports viewers) is to see a range of sports and teams, and this is

52 The 2006/07 - 08/09 rights were initially won by Arena, owned by cable operator Unity Media, despite submitting a lower bid than satellite platform / cable channel operator Premiere. However, Premiere had made their offer conditional on moving the Sportschau highlights program from 6.30pm to 10pm on Saturday evenings and the Bundesliga were unwilling to move the highlights package as it ensures that they receive some of the highest sponsorship revenues across Europe. Premiere were only able to pick up the package after Arena ran into trouble. 53 See section 4.3, The demand for sport, for more details

supported by Ofcom data showing that 47% of pay-TV subscribers find both football and at least one of cricket, golf and rugby “very important” to have as a part of their package 54 .

If this range were no longer available, consumers could well cancel their subscriptions when they did not feel that the sports package offered good value for money; for example, in the summer when there is no League football. This has happened, for example, in Greece, where the main draw is Super League football and the Nova pay-TV platform suffered significant seasonal churn as consumers churned off in the summer months 55 .

However, as examined in the demand section, the range of sports that are substitutable within the pay-TV package seems to be reasonably broad. Although a portfolio of “other” sports is important, consumers do not seem to be overly concerned about which sports they are; less than 15% of subscribers selected any one event other than football as important in subscribing to Sky Sports 56 . However, if the main elements of a number of smaller sports were removed from pay-TV, consumers might start to reconsider their pay-TV subscription.

4.6.2 Market forces mean that sports rights often consolidate in the hands of one “incumbent” pay-TV provider

In most markets, there is competition for sports rights between one or more pay-TV broadcasters and several FTA operators – in the UK, for example, major pay-TV broadcasters and Public Service Broadcasters are all in competition for sports rights. Nonetheless we often see key sports rights, especially football, concentrating in the hands of a limited number of broadcasters, often the main pay-TV broadcasters. Examples of this include:

• UK : Sky owns the rights to the Premier League, Football league, Rugby League World Cup and Super League, Rugby Union Premiership, Tennis US Open and ATP Masters, domestic Test cricket, and the Ryder Cup

• France : Pay-TV broadcaster Canal+ is the dominant player in the pay-TV system. It owns live rights to top-flight football events including Ligue 1 57 , the Champions League, Europa Cup and the Super Cup, as well as the English Premier League, Spanish La Liga, Italian Serie A and German Bundesliga. They also own rights to show Top 14 and D2 rugby

• Germany : Satellite broadcaster Premiere owns live rights to the German Bundesliga, which is “the main subscription driver” 58 , Champions League, Europa League, 2010 World Cup, and key motorsports properties such as Formula One, GP2, and Formula 3 Euro

• Italy : Satellite broadcaster Sky Italia has a number of sports properties, including, for Serie A, satellite rights to the home matches of AC Milan, Atalanta, Chievo, Fiorentina, Genoa, Inter Milan, Juventus, Lazio, Napoli, Reggina, Roma, Sampdoria, Torino and Udinese. However, because of Italian regulation, rights are currently sold individually by each club59 and also separately by platform. Mediaset has thus been able to create a successful challenger on pre-pay pay-DTT, owning the live rights for 10 clubs, all of which overlap with the live rights that Sky Italia owns 60 .

• Spain : Previously, Sogecable had controlled the majority of major sports rights, showing domestic football (La Liga), Champions League, and Euro 2008. However, a new entrant, Mediapro, has recently entered the market with significant financial backing and purchased 12 of the 42 clubs for the 2008/09 season.

54 Source: Ofcom Pay TV phase three document , Section 4.97 55 Naspers, AGM 2006, http://www.naspers.co.za/index.cfm?content=2679 56 Ofcom willingness to pay research, fieldwork April-July 2008 57 Note that Canal+ lost one of three 2008/09 season Ligue 1 rights packages to Orange, which offers its channel over its ADSL platform 58 Source: TV Sports Markets European TV and Sports Rights 2008 59 A law imposing collective selling, i.e. the sale of all Serie A rights together, was passed in 2007 and will come into effect for the 2010/11 season (Source: TV Sports Markets European TV and Sports Rights 2008 ) 60 Source: Sportcal

Mediapro show their matches on the La Sexta free-to-air channel. They own the rights to 39 of the 42 clubs for the 2009/10 season.

Concentration of sports rights is driven by the workings of the auction market and the economics of pay-TV operators. FTA broadcasters tend to have limitations on the amount they are willing and able to bid for sports rights 61 , and to be focused on certain sporting events. This means that effective competition for a significant proportion of rights mainly comes from pay-TV broadcasters, who have a steady income stream from their existing subscribers. Where there are a number of competing pay-TV operators, they often compete fiercely for sports rights due to their importance for subscribers. Sports rights increase in price (often significantly) as a result, as in the Canal+ / TPS example below. The amount that pay-TV operators have to spend often makes their business unsustainable, with operators either going bankrupt or merging as a result. Rights thus end up concentrated in the hands of one major pay-TV operator.

An example of this is the competition between TPS and Canal+ in France from 2000 to 2004. The value of live rights for Ligue 1 top flight football rose from €113m in 00/01 to €375m for the 04/05 season, a CAGR 62 of 49%, as both Canal+ and TPS sought to win sports rights. Canal+ won the majority of the rights. This rights inflation reached its high when Canal+ bid an average of €600m / season for the sports rights 63 .

One solution to this, which TPS and Canal+ adopted, is to merge. This eliminates the price competition between the two broadcasters and hence allows the (merged) broadcaster to get the same rights for a much lower price. TPS was sold to Canal+ in 2006 for €1bn 64 and Canal+ stated at the time that they were hoping to use their power as a single buyer to achieve a reduction in premium content rights. However, although in the bidding for the 2008/09 rights, Canal+ did manage to slow the growth in sports rights seen in the auction for 05/06 rights, Orange entered the market and bought up three of the twelve packages for €203m, leaving Canal+ paying less (€460m) for fewer packages 65 rather than winning all the rights for a reduced sum.

By contrast, in Germany, the value of Bundesliga rights stagnated from the 2002/03 season to the 2005/06 season at around €300m 66 . One of the reasons for this was that Kirch Media, a major broadcasting group, went bankrupt in 2002 and competition in the market dramatically diminished, with satellite broadcaster Premiere the only serious bidder for the rights

4.6.3 New pay-TV entrants need a portfolio of less-expensive sports

New entrants have often struggled to compete with existing pay-TV providers. Entrants such as Setanta in the UK 67 , Arena in Germany, Tele2 in the Netherlands (launched in 2005) and Belgacom in Belgium (launched in 2005 68 ) have all faced difficulties, often caused by overpaying for major sports rights. To be able to compete, new pay-TV entrants need to be able to build a reasonably-priced package of events, including some major events. These rights need to be suited to pay-TV (i.e. long-running regular tournaments), and at the same time be affordable for a new entrant.

61 As examples, ITV 1’s ‘07 sports budget was estimated at £130m (Source: JP Morgan broker’s report), and the BBC’s sports budget in 2004 (the latest date for which data is available) has been estimated at £250m (Source: The Independent, http://www.independent.co.uk/news/media/how-to-win-at-tv-sports-547043.html ). This can be compared to a 2007 multichannel sports budget of £896m (Source: Ofcom Communications Market 2008 ) 62 Constant Annual Growth Rate, the average year on year price increase 63 Source: Sportcal 64 Source: DigitalTV Europe, http://www.digitaltveurope.net/feature/03_sept_08/sogecable_posts_strong_digital_plus_results64 (note that the webpage is inaccurately titled) 65 Source: Sportcal 66 Source: TV Sports Markets 67 See appendix for details 68 Source: Frost and Sullivan, IPTV spreading throughout the world , http://www.frost.com/prod/servlet/market-insight- top.pag?docid=90343916

As a case in point, when Setanta secured two of six packages of Premiership rights, it also had a number of other sports properties, including home nations qualifiers, Indian Premier League cricket, the US PGA Tour and Rugby Union Magners League. Securing these rights allowed it to create a full calendar of live events around the Premier League rights, without which it would arguably have found it even more difficult to gain pay subscribers across the whole year 69 .

Exhibit 8: Illustrative Setanta live events (week commencing 18 th May 09)

Weekday Weekend

Mon Tues Weds Thurs Fri Sat Sun

S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 S1 S2 9

10 League

11 GP2 Nat’l Rugby Nat’l Rugby motorsport

12 League

13 NationalRugby League League League Scottish Prem League Indian PremierIndian 14 IndianPremier Scottish Scottish Prem Scottish Prem League League

15 Scottish Prem

16 GP2

17 League League League League Prem League League League 18 League IndianPremier IndianPremier IndianPremier IndianPremier Indian Premier Indian Premier Indian Premier 19

21 Ligue 1 Cup PGA Tour PGA PGA Tour PGA Primetime PremierLeague

22 Youth FA

23 Full calendar of events around the Premier League rights 24

Football Rugby Cricket Source: LivesportonTV.com, Setanta, TV Sports Markets, Value Partners analysis Other

New entrants are most likely to need smaller events which are suited to pay-TV where:

• rights are sold in large, aggregated bundles, as this makes it harder for new entrants to buy parts of major sports events; and /or

• existing sports rights are concentrated in the hands of a single broadcaster, as this makes it harder for a new entrant to purchase other rights.

69 However, is cannot be known what demand would have looked like in the absence of these rights

Obtaining this portfolio of smaller events is important as new entrants often face difficulties at launch and beyond, because they need deep pockets to be able to finance themselves as they roll-out 70 and also find it hard to judge how much they should pay for rights (lacking the experience and customer knowledge of an incumbent).

4.6.4 PSBs value sports highly but are unlikely to acquire substantial volumes of sport

While pay-TV platforms are driven by subscription revenues, commercial FTA broadcasters are driven by advertising revenues. To give an idea of the relative scale of the two broadcaster groups, total TV Net Advertising Revenue in the UK in 2008 was £3.2bn 71 , 70% of total pay-TV revenues of £4.6bn 72 across only five pay-TV platforms (including Setanta) 73 . The BBC’s total spend on TV from the licence fee was £2.3bn in 2008/09.

Exhibit 9: Subscription and advertising revenues in the UK, 2008

Number of broadcasters 470* 5 1

- 30% Total revenues 4.6 3.2 (£bn) 2.3

Total UK subscription Total UK TV NAR BBC spend on TV from revenues licence fee

Note: *2007 Figure for the total number of channels in the UK Source: Ofcom Communications Market 2008, Zenith, Screendigest, BBC Annual report, Value Partners analysis

Sport has a substantial value to Public Service Broadcasters, with top sporting events drawing audiences comparable with the most-viewed programmes across all genres; in 2007, the Rugby World Cup got 13.1m viewers whilst the most viewed TV show, Eastenders on Christmas Day, got 14.3m 74 . This was three or four times the viewership of top pay-TV events:

70 Ofcom have stated that there “are significant barriers to entry in acquiring live FAPL rights. Sky’s established subscriber base, coupled with other factors such as its vertical integration and brand strength, meant it could afford to bid a higher amount than any other bidder” (Sourec: Ofcom Pay TV phase three document Section 5.19) 71 Source: Zenith Global Adspend Forecasts to 2011 March 2009 72 Source: Screendigest 73 Pay-TV broadcasters are Sky, Virgin Media, BT Vision, Tiscali, Top Up Tv and Setanta 74 Source: Eurodata

Exhibit 10: Audience figures for top FTA and pay-TV sporting events, 2007

Free to air terrestrial (m) Pay-TV (m)

13.1 12.4 10.8 10.1 9.7

2.9 2.6 2.6 2.5 2.4

Rugby Euro 2008, World Cup Euro 2008, FA Cup Prem League Champ Prem Euro 2008 World Cup qlfy, Semi, qlfy, fnl, League Cup, League S- League qlfy final - England England England Chelsea Arsenal Arsenal f, AC Arsenal Estonia vs England vs. vs. Russia vs. Russia vs. M an vs. M an vs. M ilan vs vs. England vs.S. Af Croatia Utd Utd Chelsea M an Utd Chelsea

Average viewership 11.2 2.6 of top 5 events Notes: Qlfy = qualifier, fnl = final, S. Af = South Africa, Prem League = Premier League Source: Eurodata, TV Sports Markets Value Partners analysis

However, while PSBs they would be very enthusiastic to acquire a portfolio of all top-flight sports properties, they are constrained by channel capacity, budget and, for the BBC, its remit. Firstly, pay-TV operators tend to have larger sports budgets and a stronger incentive to keep major sports in order to maintain subscription levels. Secondly, FTA broadcasters have limited space on their main broadcast channel and are obliged to provide a mixture of content. They therefore cannot devote the channel space to sports that a package of dedicated pay-TV channels is able to; Sky, with Sky Sports One, Two, Three, Extra and News, is able to show 840 hours of sporting-related content per week. One of the BBC’s “public purposes” is creativity and cultural excellence 75 , which includes “covering a wide range of cultural activities” and “provid[ing] a wide range of enjoyable and entertaining content”. This limits the BBC’s ability to show too much of one genre, such as sport programming.

The events they do show tend to fall into one of four categories: a) Regulated properties

Regulation, including listed events legislation, can require certain sports properties to be shown on FTA television b) Properties which PSBs are better able to monetise than pay-TV

FTA broadcasters are better able to create revenues from certain types of sports properties than pay-TV broadcasters are. In particular, one-off events that draw large audiences (such as the Boat Race) are likely to be less valuable for pay-TV channels. A single event on its own is less likely to persuade subscribers to pay for a full month’s worth of sports. For commercial PSBs, on the other hand, large one-off sporting events are

75 Source: BBC website, “About the BBC”, http://www.bbc.co.uk/info/purpose/public_purposes/creativity.shtml

very good at drawing in viewers and hence advertising revenues, as can be seen from the average audience figures above.

c) Properties which gain a lot of revenues from sponsorship

Some sports are particularly dependent on sponsorship for their revenues. Sponsorship is driven by exposure of the sponsor’s brand across media, a large part of which is dependent on broad TV coverage. Because pay- TV audiences are typically lower, even for top-flight events, moving to pay-TV could cause a sport to lose its sponsors and cause a decrease in the sport’s revenues. It would require a very large offer from pay-TV to move a sport away from FTA. Formula One, where sponsors provide over 80% of the sport’s revenues, has consistently sold its rights to FTA television.

The German Bundesliga is another example where sponsorship has been one of the reasons for maintaining FTA programming (as highlights) even though this has reduced the value of live (pay-TV) rights. The Bundesliga has the highest shirt sponsorship in Europe for the 2008/09 season 76 , 20% more than the English Premier League. This, combined with public pressure, has driven the Bundesliga’s decision to continue with the FTA highlights program Sportschau in its 6.30pm slot despite a negative impact on value of the live rights. As a consequence, in 2005, Arena, a media company founded by one of the cable operators, was able to win the rights against a bid from the Premiere satellite platform, despite making a bid that was 20% lower. This was because Premiere had insisted that Sportschau be moved to 10pm.

d) The greater reach of FTA helps to fulfil other aims for the rights holder

Some sports remain on FTA TV to fulfil other, non-monetary, objectives. For example, Wimbledon has been sold to the BBC because it allows them to maximise reach and drive participation 77 , despite the fact that selling to a pay-TV broadcaster could generate greater revenues for the rights holder.

For other sports it is often worth keeping an element of the sport on FTA television to provide a broad base of current and future support. The International Olympics Committee has recently sold rights for the 2014/16 to pay-TV broadcasters such as Sky Italia and Fox Turkey 78 . It has required Sky Italia to resell a core of 200 hours of the Summer Olympics to FTA to ensure that reach is maximised for the most important sports 79 .

4.7 How do sports rights holders decide how to sell their rights?

Sports rights holders tend to auction the broadcast rights in a number of “packages”. Typically these are divided into a number of live and non-live packages, which each cover different windows. Live windows allow broadcast simultaneous with the match itself, whilst there are a number of types of non-live window, including:

• near-live, where the owner of the rights is allowed to broadcast the match in full a few hours after play;

• highlights, where the rights owner is allowed to show a certain amount of the match after play;

• clips, allowing the rights owner to produce short-form clips, either for use in news / analysis programming, for use online or to download on mobiles

76 Germany’s 18 clubs received a total of £88m for shirt sponsorship, 20% more than second-placed England with £73m.The top kit sponsorship deal was Bayern Munich’s deal with T-Home for £17m per yearSource: SPORT+MARKTEuropean Jersey Report 2008/09 as reported in the Times, http://extras.timesonline.co.uk/pdfs/sport/shirtsponsorship.pdf 77 The All England Lawn Tennis Club (AELTC), which sells Wimbledon, has said that it sells to the BBC because of “the Club’s appreciation of the production effort that the BBC brings and the audience it delivers to the championships every year” (Source: AELTC website). The Wimbledon tennis finals are a Group A listed event, i.e. they can only be shown exclusively on FTA television. Non finals play is a Group B listed event, so the live coverage could be sold exclusively to a pay-TV broadcaster 78 Source: TV Sports Markets 79 Sky Italia have accomplished this by selling the FTA rights to Italian FTA broadcaster RAI

• archive, which covers all use of the sports occasion after the exhaustion of the other rights windows.

Sports rights holders have a number of objectives when selling their rights. One aim is to maximise the revenues they receive from the rights auction, allowing more money to be put back into sport. However, there are a number of other objectives, including maximising of other revenues streams, such as sponsorship and the promotion of the sports at all levels – potentially involving grassroots support as well as broader media coverage. In addition, sports rights holders may choose to stay with their existing broadcaster because of the relationships and trust that have been built up, the technical skills and production values that they possess, and the audience’s affinity with the sport on a particular channel. Sports rights holders are increasingly sophisticated about the need to balance rights value with sponsorship value and wide public accessibility and looking how to use the benefits that both pay-TV operators and PSBs provide.

4.7.1 Pay-TV delivers significant revenues to many sports rights holders

a) Direct pay-TV revenues

Pay-TV, with its ability to generate significant value from its premium sports subscriptions, can be a significant source of revenue for some sports rights holders. As the IOC’s move to pay-TV has shown80 , pay-TV is typically able to generate more money for sports rights holders than FTA television, in particular for sports that are well suited to being shown on pay-TV. Further examples of this include cricket, where the ECB sold all live cricket to Sky for £220m for 2006-2009, and £300m for 2010-2013, against the £135m that Sky and Channel 4 jointly bid for the 2003-05 rights. This is an increase of 8% per year on average from 2003 – 2010. The 2006- 09 rights auction itself demonstrated the revenue difference that pay-TV exclusivity offers, with a joint C4 / Sky bid for all four years of £117m 47% lower than the Sky-only bid of £220m (although Channel 4’s lower bid than in the previous rights auction may indicate it had lost interest). Rugby Union’s move to pay-TV has also increased its total revenues. Before 1997, Rugby Union sold its rights to the Five Nations to the BBC for £4m per year (1994-97) and other minor rights for £2.3m per year 81 . When Sky seriously entered the market in 1997 it paid £13m for a package of all England home matches in 1997, including the Five / Six Nations (Italy joined in 2000). This represented growth of 106% from contract to contract.

Pay-TV revenues may allow sports rights holders to return cash to the teams whose rights they sell and to invest in the game. For example, the ECB has been able to sustain an increase in grassroots funding at a local level since it sold its sports rights to Sky in 2006 without materially growing the proportion of its total revenues spent on such activities 82 :

80 The IOC has been able to sell rights in Turkey for €23m per year, reportedly three times more than the state broadcaster TRT paid. Source: TV Sports Markets. Note that this is only one example. 81 Kagan Europea TV Sports Databook 1995 82 OF course, there may be other effects of moving to Sky, such as lowering the visibility of cricket

Exhibit 11: ECB revenues and grassroots funding

Total ECB revenues C4 deal Sky deal Grassroots funding

93.0 94.5 75.1 78.8 77.1

10.2 12.0 5.3 8.7 9.0

2004 2005 2006 2007 2008

Grassroots investment as % revenues

7% 11% 12% 11% 13%

Note: Revenues decreased in the first year of the Sky deal (2006) before increasing for 07 - 08 Source: ECB Annual reports b) Creation of competition for sports rights

In addition to direct revenues, pay-TV also provides a competitor to free-to-air TV in rights auctions. Thus, for any open auctions, even ones which are won by FTA broadcasters, there could be a positive impact on rights value from having pay-TV broadcasters involved in the process. Listing events would remove these broadcasters from the competition and could depress rights values.

The growth in the value of Six Nations rights per year may be one example of this:

Exhibit 12: Six Nations rights per annum (£m)

Overlapping rights periods: Sky and RFU 1997- 40 2001, BBC and Six Nations Committee 2000-2002

25 21 40 13 13 (1,2) 12 (3) 30 21 6 4 13 12 12 6 4

91 94 97-99 00-01 02 03 - 05 06-09 10-13

BBC Italy joins to form Sky does not Six Nations contest rights Sky

Notes: (1) The BBC showed some live games in the period 1997-1999, although it is unclear how much it paid for these rights (2) Sky’s 5 year deal with the English RFU included all England home matches, including Six Nations, Test matches, Autumn internationals, as well as English domestic league rugby (3) This figure is an estimate. It is likey that, as Sky’s deal with the RFU was not renewed, the BBC paid an extra amount on top of their existing deal to take live rights to all live games that season. However, this has not been included Source: SNL Kagan / Kagan Research, TV Sports Markets “European TV and Sports Rights 2006”, Press reports, Value Partners analysis

In this case, the value of rights escalated sharply when Sky entered the market for Six Nations games in 1997, doing a deal with the Rugby Football Union for England home games, including all Six Nations fixtures. In 2000, England reverted to selling its rights collectively through the Six Nations Committee and the BBC won the rights, initially for a lower sum than Sky was paying (£12m for the BBC vs. £13m for Sky). However, since the end of the BBC’s first rights deal in 2000-02, the value of rights has escalated sharply, almost doubling from 03-05 to 10-13. This suggests that the price rise may have been due to the increase in competitive pressure that Sky applied through winning the rights in 1997-2001. Of course, this price rise may also been caused by other factors, for example England’s victory in the 2003 Rugby World Cup 83 , or the increase in support due to the reach and exposure from PSB broadcast.

It cannot be assumed that competition between FTA broadcasters will sustain existing market values for listed events. FTA broadcasters often have limited budgets for sport and are forced to focus on certain events. This could lead to a situation where there is only one “real” competitor for a given event. An example of this may be ITV’s bid for the UEFA Champions League rights 09/10 – 11/12. In order to be able to fund this, ITV appears to have decided that it needed to give up its rights to Formula One, which were then acquired by the BBC. If correct, this example illustrates the effect of constraints on the budgets of FTA sports broadcasters. FTA broadcasters also have better-understood preferences for certain sporting events (e.g. ITV has concentrated

83 Source: BBC News, http://news.bbc.co.uk/sport1/hi/rugby_union/international/3228728.stm

on live football, whilst the BBC has a much broader portfolio with almost no live football), which they tend to focus on. It can be much harder to switch which sports properties they show as the timing of the “rights windows” for sports do not necessarily line up (i.e. the broadcaster would face a period with no sports properties or too many sports commitments).

In a market such as that for sports rights, where there are only a few real buyers with the scale and reserves to buy key sporting properties, pay-TV competition can help sports rights holders to realise the full value of their rights by competing at auction even when they do not ultimately buy the rights.

4.7.2 PSBs are able to deliver audience size and reach

a) Increase in audiences drives participation in the sport

Showing a sport on FTA television can increase interest and participation in that sport. This is one of the reasons that the All England Lawn Tennis Club (AELTC) has kept Wimbledon on the BBC; “to make tennis as accessible as possible for people, from both a playing as well as a viewing perspective" 84 . As a further example of this, the Premier League’s highlights are not listed but highlights have been sold to FTA television - either the BBC ( Match of the Day ) or ITV ( The Premiership ) - for over 15 years.

However, pay-TV can also be used to build a broader demand for sports, although in the short term the move from FTA television can erode reach. An example is Rugby League. Between 1991 and 1993, professional Rugby League clubs lost £8.8m and, of 31 clubs, 17 were technically insolvent 85 . In 1996 Sky negotiated a five-year £87m contract with Rugby League to create the Super League, a new summer competition, which it renegotiated to reduce the rights value by 48% in 1999. In the short term this affected both average viewing figures, which fell from c. 3m 1992-1995 on the BBC to 0.14m in 1997 for Sky’s matches 86 . However Rugby League as a whole has since benefited significantly – as an example, 2007 saw the highest average attendance at season games, a new record for most supporters at a single round of fixtures. 2006 saw the highest TV audiences across the season since the creation of the Super League. Of course, the move to a summer event itself may have been at least partly responsible for the increase in popularity

b) A broad reach can maximise other revenue streams

For a number of sports, broadcast on FTA is the best way to ensure overall revenue maximisation. These tend to be sports where sponsorship is key – for example, Formula One. Sponsors fund the F1 Group, which creates the tournament, as well as the tracks and the teams themselves, where 80-85% of revenues come from sponsorship. Thus, although F1’s current deal with the BBC is fairly low (£30m per year for a five year deal 87 ), a pay-TV broadcaster would need to bid substantially higher to replace the lost sponsorship revenues from a smaller audience. It would also require a wholesale change to the funding and structure of the sport.

c) Long-term brand associations and production capabilities

Where a sports rights holder is already selling its rights to a FTA broadcaster, there are a number of benefits it gains from that relationship. The existing FTA broadcaster will have the staffing, technical skill and production to cover the sport well. In other cases, as with Wimbledon, audiences are accustomed to watching certain

84 Quoted in the Telegraph, Wimbledon demands centre stage on BBC , 06 April 2009 85 DCMS, Culture, Media and Sport Second Report, Appendix 5, http://www.publications.parliament.uk/pa/cm199900/cmselect/cmcumeds/99/99ap06.htm 86 DCMS, Culture, Media and Sport Second Report, Appendix 5, http://www.publications.parliament.uk/pa/cm199900/cmselect/cmcumeds/99/99ap06.htm 87 Telegraph, BBC win back Formula One television rights , http://www.telegraph.co.uk/sport/columnists/andrewbaker/2295046/BBC-win-back- Formula-One-television-rights.html

sports on certain types of broadcaster, and to move to a pay-TV broadcaster could not only lose viewers but cause public outcry.

5 Evidence of impact to date

5.1 Summary • Event Listing does not appear to have impacted Sky – having built what many regard as the world’s most successful pay-TV business under a listed events regime. At the last change in listing in 1998, when the European Football Championship Finals Tournament, Rugby League Challenge Cup Final and Rugby World Cup Final were added to the A list, and Test match cricket and the Commonwealth Games were removed, Sky’s subscriber growth increased. There are many more factors than sports rights that govern Sky’s performance but it is difficult to find any correlation with event listing.

• In the last ten years, two major new entrants into the subscription sports market have failed. The requirement to commit large sums to sports rights, several years in advance of broadcast and of having the customer base to recoup the investment makes entering this market very challenging. ITV Digital (which failed in 2002) and Setanta (2009) arguably lacked experience and the financial resources to survive an economic downturn. There is no evidence that listed events had any bearing. If anything, listing events may help new entrants by ensuring Sky cannot create an even more powerful sporting proposition

• By comparison, the listing of events has probably decreased value for some sports rights holders; English cricket, for example, has achieved much higher prices since delisting by selling its rights to Sky. However, it is impossible to quantify what income has been lost to rights holders due to listing, given the other factors that influence sports rights valuations; it will depend on the nature of the event and the commercial structure of the sport (e.g. events with more sponsorship are less likely to have been affected). It is possible that an initial increase in rights fees due to delisting may prove temporary if a sports property were to lose its relevance to a free- to-air (FTA) audience and failed to create any competition for its rights within the pay-TV sector but this remains to be seen in practice.

5.2 Introduction

This chapter considers the historical evidence of the impact of listing events on both the broadcast and sports markets.

Sport is one of, if not the most, essential components of successful pay-TV. Most major pay-TV broadcasters use sport as a key driver of their consumer proposition. New pay-TV sports entrants also need to attractive sports rights to be credible. This means that the potential for significant market impact is most likely to arise in the case of the listing of either: a major sporting property that suits the commercial characteristics of pay-TV (i.e. long-running, with several hours of content each active week), or a large number of sports events (which, cumulatively, take on the characteristics described above).

In the sports rights market, listing events could reduce the revenues that rights holders receive. The magnitude of the impact dependent on whether pay-TV currently broadcasts the rights, the number of bidders for the rights and their financial position and how far the sport would benefit from being broadcast on FTA.

5.3 Impact on the broadcasting market

5.3.1 Impact on Sky

With 8.7m (66% of all UK pay-TV homes 88 ) Sky is the UK’s largest pay-TV provider. It has a market capitalisation of £8bn 89 and according to Ofcom has been able to produce aggregate returns of over 20% 90 . It has increasingly used its resources and power to sell a converged triple play proposition (including tiered basic and premium channel packages, functionality such as Sky+ and HD, and bundled broadband and telephony. Since entering the entered the broadband market in 2006 91 with a ‘free broadband’ offer for Sky subscribers it has become the #4 broadband provider in the UK with 10% market share.

Sky wholesales its premium channels, including Sky Sports, to the Sky platform and Virgin Media cable. It does not release subscriber numbers for its premium sports channels (although analysts estimate that, approximately 70% of the Sky platform’s customers (6m) take premium sports packages)92 . Given this popularity of Sky Sports for Sky subscribers, and the importance of Sky Sports to the overall Sky platform and its economics 93 , this report has used subscribers to the Sky platform as a proxy to examine the impact on the Sky Sports channels.

Exhibit 13: Sky subscribers (m)

Sky starts conversion Sky turns off to digital analogue signal 7.7 8.0 8.3 8.7 6.9 7.3 6.3 5.5 4.9 3.4 3.6 3.5 3.9

96 97 98 99 00 01 02 03 04 05 06 07 08

Y.o.y 4% -3% 12% 27% 12% 14% 10% 5% 6% 4% 4% 4% growth (%)

Gross 0.1 - 0.1 0.4 1.0 0.6 0.8 0.6 0.4 0.4 0.3 0.3 0.4 adds (m)

1998 listed events review

Source: Screendigest

88 End 2008. Source: Screendigest 89 Source: Guardian 28 th June 2009, http://www.guardian.co.uk/business/2009/jun/28/sentant-bskyb-football 90 Source: Ofcom Pay TV phase three document 91 Source: Guardian 1 st July 2006, BSkyB poised for bold entry to broadband market with aggressive 'triple-play' deals, http://www.guardian.co.uk/technology/2006/jul/01/news.rupertmurdoch 92 Source: TV Sports Markets European TV and Sports Rights 2008 93 In the latest Ofcom pay-TV review, Ofcom, in consulting on the view that “Sky is acting on the incentive to restrict supply of Core Premium channels to other retailers”, points out that Sky “does not have an incentive to retail its content as effectively on other platforms as on DSat, because if its Core Premium channels are purchased elsewhere it loses the revenues that it can earn by bundling them with other content and services.” (Source: Ofcom Pay TV phase three document , 1.29)

Sky enjoyed accelerated subscriber growth post the 1998 listed events review rather than any drop off in subscriptions, despite the fact that European Football Championship Finals Tournament, Rugby League Challenge Cup final and Rugby World Cup final were all added as Group A listed events 94 . However, in this period, Sky was migrating its customer base from analogue to digital and actively marketing its digital proposition, which increased the number of Sky channels from 120 in 1998 on Sky analogue 95 to 370 on Sky Digital in 2002 96 . It is therefore impossible to disaggregate the impact of listing events. However, it is clear that the addition of new listed events did not prevent Sky’s continued subscriber growth. Even Setanta’s acquisition of two of the six live Premier League packages in the 2007/08-09/10 rights auction does not seem to have slowed subscriber growth significantly.

This suggests that Sky’s growth over the last nine years has not been held back by the listing of events. It is theoretically possible that Sky would have grown more rapidly had certain events not been protected; but the magnitude of this is very difficult to judge 97 . It is worth noting that Sky do not claim in their submission 98 to DCMS that listed events have impacted their growth. Indeed, despite listed events, Ofcom are of the view that Sky has market power in the wholesale market for premium sports and are consulting on whether they have power in the market for the retail of Core Premium Sports 99 . Sky has a significant portfolio of existing sports events that gives them the volume to retain subscribers.

5.3.2 Impact on new entrants

The listing of events could, in theory, prevent a new entrant from being able to buy the package of rights they need. However, there is no evidence that an inability to access listed events has played a significant factor in the success or failure of Eurosport, ITV Digital or Setanta in the UK. There are a wide range of sports rights available to pay-TV in the UK and the major issue that both ITV Digital and Setanta faced was overpaying for their core football rights, which would not have been avoided by having listed events available for purchase 100 . Indeed, it could be argued that listed events actually helped new entrants by preventing Sky from acquiring an all-encompassing proposition and preventing a new entrant competing.

5.4 Impact on the sports rights market

The sports rights market is the other market that could be affected by listing. Once again, this is complicated by the number of variables that affect the price of sports rights. One of the most important of these is the fact that the price is determined in the downstream broadcasting market through competition for broadcasting rights.

One proxy to determine the potential impact is the views of sports rights holders themselves. If sports rights holders were negatively affected, then they would be unwilling to have their events listed, and might even try to challenge the listing of those events. This is what can be observed; at the time of last review in 1998, a number of broadcasters, including both the ECB and the Lawn Tennis Association argued against their listing, whilst both FIFA and UEFA have undertaken legal challenges to the listing of the FIFA World Cup and

94 In the 1998 review Test match cricket and the Commonwealth games were downgraded to Group B events, with highlights only protected 95 Source: Sky website http://hd.sky.com/what-is-hd/analogue-vs-digital-television/ 96 Source: Screen Digest (2004 97 Reinforcing this, Ofcom have also said that “current listed events are not available on a regular basis and would therefore be unlikely to drive subscriptions to pay TV” (Source: Ofcom Pay TV phase three document , section 4.73) However, note that nonetheless listed events could provide an additional sports portfolio which could form a part of a pay-TV provider’s offer. Given Sky’s large existing portfolio of sports, it is unlikely that the limited number of listed events has had a material impact. 98 Free-to-air listed events review, Submission from BSkyB, May 2009, http://media.sky.com/documents/pdf/press_releases/Sky_Listed_Events_Submission 99 Source: Ofcom Pay TV phase three document 100 Ofcom have stated that “current listed events are not available on a regular basis and would therefore be unlikely to drive subscriptions to pay TV” (Source: Ofcom Pay TV phase three document, section 4.73)

European Football Championship Finals respectively 101 . This legal challenge is currently underway before the European Court of First Instance and the statements from all stakeholders are confidential.

Examination of sports properties that were delisted in the 1998 review, such as English cricket rights, indicates the impact of listing on sports rights values. Cricket rights are sold by the ECB as a package of all live rights, covering all international domestic cricket. Before 1998, the entirety of this live package (as it contained England test matches) had to be sold to a FTA broadcaster. After 1998, when Sky was able to compete for rights, a joint bid by Channel 4 and Sky successfully won the rights from the BBC, increasing rights values by 73%, from £15m for 95-98 to £26m per year in 99-02. Further evidence comes from the 2006-09 rights, auction, where the C4 / Sky joint bid of £29m per season was outbid by a Sky-only bid of £52m per season:

Exhibit 14: English cricket rights value per annum (£m) 102

52 Winning Sky 45 solo bid

15 C4 / Sky joint 29 bid

95-98 99-02 03-05 06-09

Rights owner

It is unlikely that, had cricket continued to be listed, rights values would have escalated as rapidly as they did. Broadcasting revenues are also very important for the ECB; in 2008, 55% of the ECB’s total revenues of £94.5m 103 came from the sales of domestic broadcasting rights. Of course, the value in the future depends on competitive dynamics – fewer serious bidders could cause a decrease in rights values. It is possible, for example, that if FTA broadcasters lost interest in showing sports, Sky could be left as the only serious broadcaster for the rights. However rights holders may be able to mitigate such a situation by creative bundling of rights to attract alternative bidders.

5.5 Conclusion

Listed events have existed in the UK, in some form, for over 50 years. They do not appear to have had a significant impact on the broadcast market. The Sky platform has continued to grow from strength to strength, and this is not likely to change given Sky’s market power. The difficulties face by new entrants like ITV Digital and Setanta have resulted from overpaying for sports rights rather than lacking access to listed events. Listed

101 FIFA and UEFA are both foreign organisations, managing rights on an international basis. While some of their revenues flow back into the UK market, there is unlikely to be a material domestic impact from the listing of these events. 102 Does not include new media rights, sold to Vodafone and Hutchinson 3G in 2004 103 Source: ECB Annual report 2008

events may well have helped new entrants by ensuring that Sky was not able to buy up all sports rights and construct a position as the only place for sport.

For some listed sports rights holders the reduced number of potential buyers which results from listing may have reduced the fees they have received for their rights. This may be the case for FIFA and UEFA with the World Cup Finals Tournament and the European Football Championship Finals Tournament, which are well suited to pay-TV 104 as tournaments running over a few weeks with a high volume of events. The example of cricket also suggests that delisting may help to accelerate growth in rights values by increasing competition for rights. However this effect is almost impossible to quantify due to the inability to establish the market price would have been.

104 However, note that both FIFA and UEFA are both foreign organisations, managing rights on an international basis. While some of their revenues flow back into the UK market, there is unlikely to be a material domestic impact from the listing of these events.

6 Market evolution

6.1 Summary • The broadcast and sports rights markets are changing, and this could change the impact of listed events.

• In the broadcast market, Digital Switch-Over will increase the number of qualifying channels and provide further momentum for audience fragmentation. New technologies will change how viewers watch TV: HD will increase the value of sports as a differentiator, on-demand viewing will increase the importance of “appointment to view” programming. Sports’ ability to attract large live audiences will become increasingly prized.

• In the sports rights market, falling production costs and innovations in production technology are enabling sports rights holders to create more hours from a single event. As an example, the Olympics Games more than doubled the volume of hours produced between Seoul (1988) and Beijing (2008), whilst the Winter Olympics saw a threefold increase between 1992 and 2006 105 . Rights holders are also increasingly sophisticated in the way that they sell their rights; bundling rights into a greater number of packages to appeal to a wider range of broadcasters in order to increase competition.

6.2 Introduction

The last review of listed events in the UK was in 1998, when multichannel penetration was 28% 106 , 14% of households took Sky’s pay service, but only 7% of these had upgraded to digital 107 , only 20% of households had an internet connection and broadband access was minimal; and Sky paid £168m per season to show 60 Premier League matches.

The current review is being undertaken in a very different environment. Nine-tenths of households 108 have access to multichannel TV, sports can be viewed online or on mobile as well as on TV, and both the volume of sports shown on TV and the value of those associated rights have increased dramatically 109 .

The full effect of the current review will only be felt in three to five years (when most current sports rights contracts come to an end). To assess the potential impact of any changes to listing, it is necessary to understand how the market is and will change.

105 Source: IOC, EBU 106 Source: Screendigest UK market summary 107 ibid 108 Source: Screendigest 109 Sky will be paying £115 each season from 2009/10 for 115 Premier League matches

Exhibit 15: Timeline of listed events rights expiry

2009 2010 2011 2012 2013 + Current broadcaster Group A 1

Olympic Games BBC

FIFA World Cup BBC / ITV Tournament

FA Cup Final (2) BBC Scot.

Scottish FA Cup (3) BBC Final

The Grand BBC National

The Derby BBC

Wimbledon BBC Tennis Finals

European Football (4) BBC Championship Fnl

Rugby League BBC Challenge Cup Fnl

Rugby World Cup (4) ITV Final

Group B

Cricket Test Five Matches

Non-finals play in BBC Wimbledon

Rugby World Cup ITV Finals (4) Tournament 5

Six Nations Rugby BBC

Commonwealth BBC Games (4)

World Athletics BBC Championship

Cricket World (4) Cup 6

The Ryder Cup BBC

The Open Golf BBC

Note: (1) For the previous broadcast event (2) To the end of the 2011/12 season (3) To the end of the 2009/10 season (4) Rights not yet sold; date indicated is the year of the next event (5) Tournament Matches Involving Home Counties (6) Final, Semi-finals and home nations matches Source: TV Sports Markets, Sportcal, BBC news. Value Partners analysis

6.3 Broadcasting market trends

6.3.1 Multichannel and pay-TV penetration will continue to grow

Over the last ten years, the penetration of multichannel in the UK has grown from 25% of TV households to 88%. Growth was driven primarily by take up of the Sky pay-TV proposition, which now reaches 34% of TV

households (66% of the pay-TV market) and, since 2002, by take up of Freeview’s FTA proposition on DTT, which now has a penetration of 38% of TV households’ primary sets.

Exhibit 16: Growth of the penetration of UK multichannel

100% Free multichannel Other pay 80% Sky Collapse of ITV Digital pay DTT platform 60%

40%

20%

0% 98 99 00 01 02 03 04 05 06 07 08

Source: Screendigest, Value Partners

Over the next five years 110 multichannel penetration will be driven by Digital Switch-Over (DSO), replacing analogue signals with digital signals. This will be completed by 2012 when 100% of households will have digital television. Sky and Virgin’s market share will increasingly be driven by bundling pay-TV with telephony and broadband to attract new subscribers and by adding new capabilities (such as HD and on-demand) to prevent churn. Historically, Sky has done this very successfully; within a year of launching its broadband plus pay-TV offering in 2006, Sky had one million broadband customers, of whom 30% were new to the pay-TV service 111 .

6.3.2 Audiences will continue to fragment

What consumers watch on TV, and how they watch it, is changing. With digital penetration, audiences are fragmenting. The viewing share of the five analogue channels has fallen from 86% in 1998 to 58% in 2009 112 , whilst the share of digital channels has grown threefold.

110 The five year time horizon is important as this is the period over which contracts for any of the events added to the list will change (see appendix) 111 Source: The Consumer Association, http://www.which.co.uk/news/2007/10/one-million-join-sky-broadband-124695.jsp 112 Source: Thinkbox / BARB / Tech Edge. Note 2009 data is to March 2009

Exhibit 17: Channel viewing shares over time

100% Others

80% five

60% C4

40% ITV (inc. GMTV)

20% BBC 2

0% BBC 1 99 00 01 02 03 04 05 06 07 08 09*

Note: * 2009 data to March 2009 Source: Thinkbox / BARB / Tech Edge

The launch of PVRs and on-demand catch up services to the PC has allowed viewers to download or record television for later playback. This is particularly popular with younger demographics – for example, for the teenage drama Skins, 41% of all viewing was non-linear platforms 113 .

6.3.3 Economics of Free-to-air Broadcasters will remain under pressure

Increasingly, the economics of commercial FTA broadcasters are under pressure. Revenues are down as audiences have fragmented and a combination of economic downturn and migration to online has reduced spend on television advertising; and a migration that may be compounded by ad skipping on time shifted content. Costs are up as broadcasters have to invest in both digital and analogue transmission and in a portfolio of digital channels to maintain overall viewing share.

6.3.4 DSO will broaden the number of broadcasters qualifying to bid for listed events

DSO will mean that all homes will have access to a broader range of digital channels and that more capacity could become available for additional channels on Freeview. This will increase the number of qualifying broadcasters who can bid for listed events (to all broadcasters on Digital Terrestrial Television (DTT) including Virgin 1, Sky 3 and Sky Sports News). It will also increase the channels that existing PSBs can use to show listed events (to include, for example, BBC 3 and 4 and ITV 2,3 and 4); enhancing their scheduling flexibility. In addition, with more qualifying channel capacity there could be the opportunity for a new FTA sports channel (such as Eurosport or ESPN) on DTT.

113 Source: C21 Media, 1 st April 2009

Exhibit 18: Qualifying Freeview broadcasters after 2012

Current qualifying broadcasters New qualifying channels from existing PSBs

+ New post-DSO broadcasters

(1)

Note: (1) Sky channels involved would be those on Freeview; currently this includes Sky Three, Sky News and Sky Sports News Source: Freeview website, broadcaster websites

6.3.5 High-definition TV will become mass-market

High-definition TV (HDTV) allows broadcasters to show sharper, clearer pictures, with over four times the resolution of a standard definition TV 114 . Forecasts predict that over 22m households could have access to HD by 2013, of which 8.5m could have the highest-quality “Full HD”. Sport is a big driver of HD which provides greater clarity to fast-moving action. Sky is using sports to drive their premium priced HD proposition, generating further value from their sports rights. BBC and ITV are also using sport to drive HD on Freesat (for example ITV HD was launched in time for Euro 2008 115 ) and HD propositions are likely to roll out on Freeview pre and post DSO,

114 A standard PAL broadcast shows 0.4 megapixels in a 4:3 screen ratio. The highest-quality HD broadcast (1080p) uses 2.1 megapixels in a widescreen, 16:9 screen ratio. Currently 1080p is used for Blu-Ray discs rather than broadcast TV. 115 ITV website, http://www.itvplc.com/media/newsrelease/?page=3&id=2922

Exhibit 19: Number of High Definition households (m)

Forecast

HD Ready 20.0 21.3 22.7 Full HD 17.2 13.9 10.9 8.5 6.6 6.8 4.9 2.5 2.2 3.4 0.6 0.0 0.6 1.5

05 06 07 08 09 10 11 12 13

Note: HD ready = Households with a HDTV (minimum of 720 lines, HDMI connection); Full HD = households with higher-resolution 1080p sets Source: Screendigest

6.3.6 Catch up and on-demand will change how some sports are watched and rights are packaged

New “on-demand” ways of watching programming such as BBC iPlayer on the PC and increasingly to-the-TV propositions such as Virgin Media’s on-demand service will become more important. On-demand services will allow catch-up viewing of both highlights and live sport. While historically sports have not been shown on- demand due to rights issues, more recent FTA sports deals have allowed rebroadcasting online. Such deals include: Six Nations Rugby coverage being made available for seven days after live BBC TV broadcast 116 in January 2008; Match of the Day 2, with Premiership highlights, made available for catch-up viewing on iPlayer 117 from January 2009,; and Five’s highlights Ashes coverage, broadcast on TV at 7.15pm each day, being made available from 10pm on its online service, Demand Five 118 , from June 2009. However, broadcast media are well suited to showing live sports, and this is unlikely to change dramatically in the near future 119 .

6.4 Sports rights market trends

In the sports rights market, there has been a substantial growth in the volume of sports content available. This has been accompanied by a growth in platforms wanting to shows sports, including mobile and online. In response, as pay-TV broadcasters consolidate, sports rights holders have created smaller rights packages to allow new entrants and PSBs to purchase some sports rights. There has also been growth in the number of non-live packages as rights holders try to optimise the value they receive from broadcasters and other users of sports content such as mobile operators.

116 Source: IPTVWatch, http://www.iptv-watch.co.uk/31012008-bbc-iplayer-to-show-six-nations-rugby.html 117 Source: Telegraph online, www.telegraph.co.uk/sport/football/4375429/Football-highlights-will-be-available-on-BBC-iPlayer-for-the-first- time.html 118 Source: Sportcal, Cricket – 30 th June 2009 119 Ofcom state “Broadcast media are intrinsically well suited to content which is based on mass participation in major live events, and this is unlikely to change in the near future” (Source: Ofcom Pay TV phase three document )

6.4.1 More sports content is becoming available

The number of hours of sports shown on TV has grown from 33m hours in 2003 to 38m hours in 2007, 90% of all which is shown on pay-TV. While the amount of sport shown on FTA has fallen over the past five years (03-07 CAGR 120 of -4.0%), the amount shown on pay-TV has grown (03-07 CAGR of 4.6%) 121 .

Exhibit 20: UK sports television output

Hours of sport broadcast in the UK, 2003 Hours of sport broadcast in the UK, 2007

FTA, FTA, 3.9m Total Total 4.6m hours hours

33.0m 37.9m

86% 90% Pay-TV, 28.4m Pay-TV, 34.0m

Source: Sports Marketing Surveys, Mintel

This has been driven by an increase in the number of sports shown on TV, especially new niche sports events (e.g. the Red Bull Air Race, since 2003), and growth in hours produced for sporting events, with the rise in broadcasting capacity and decline in production costs, and a continued interest in and demand for sport on TV 122 The Olympics Games more than doubled the hours produced between Seoul (1988) and Beijing (2008), whilst the Winter Olympics saw a threefold increase between 1992 and 2006.

120 The CAGR, or Constant Annual Growth Rate, is the average year on year growth rate between two points, i.e. between two years. Technically this is a geometric mean. 121 Source: Sports Marketing Surveys, Mintel 122 See section 4.3, The demand for sport , for more details. Ofcom has stated that “live top-flight sports programming is likely to have a continuing appeal, regardless of technical change” (Source: Ofcom Pay TV phase three document )

Exhibit 21: Hours of broadcast produced by host broadcaster (000s hrs)

Summer Olympics Winter Olympics

14% 5.0 3.5 3.8 30% 2.6 2.8 3.0

0.9 1.0 0.4 0.3 0.6

88 92 96 00 04 08 92 94 98 02 06

Source: International Olympic Committee Olympic Marketing Fact File , EBU

6.4.2 Sports rights are being sold in different ways

a) Live rights are being broken into more packages

For major sports, rights holders are adapting how they package rights. In the early 90s, live rights were typically sold in one package, creating an all- or-nothing model for bidders. In the late 1990s and early 2000s live rights packaging evolved to encompass several live packages, broken down by platform or type of retail proposition (e.g. subscription or PPV). This allowed rights holders’ to maximise competition between broadcasters. Most recently, due to competitive dynamics for broadcasters and regulatory interventions, there has been a trend towards selling a greater number of smaller packages. These give smaller broadcasters a theoretical chance to win at least one of the packages and also encourages pay-TV incumbents to bid for as many packages as possible.

Developments at the French Ligue de Football Professionnel (LFP) illustrate this evolution. The LFP had one live package for the 2005/06 – 2007/08 rights, when there was competition between pay-TV broadcasters TPS and Canal+. However, in 2006, after almost doubling its bid for the Ligue 1 rights to €600m per season 123 Canal+ bought TPS. At this point Canal+ indicated its intention to pay less for the Ligue rights. In response, the Ligue split the rights into 12 packages. This made the rights affordable to smaller broadcasters and Orange Sport (broadcast on Orange ADSL) managed to win one of the live packages as well as the Magazine and Mobile packages. The total value (after a second round of bidding) was €668m per season, 11% up on the previous deal.

The regulatory impact can also be seen by looking at the English Premier League. The 2001/02-03/04 season raised £430m with one live package (won by Sky) and one PPV package, won by Sky ONDigital, NTL and Telewest. 2004/05-06/07 auction raised £341m. The Premier League was required to unbundle its live rights into four packages, a Gold package for 38 Sunday afternoon games, a Silver package of 38 Monday evening games, and two Bronze packages of 38 Saturday afternoon games each. All of these packages were purchased by Sky. In the 2007/08-09/10 Premiership deal, the European Commission required the Premier

123 For more details see section 4.3.3.b, “One or two pay-TV broadcasters often own the majority of premium sports rights – Incentives to merge ”

League to divide matches into six packages of equal value to fans. At least one of these packages could not be bought by Sky. At the end of the auction, Sky acquired four packages and Setanta two. The auction raised £569m.

Pressure from the European Commission has also driven UEFA’s decision, starting with the 2003/04 season, to offer at least two Champions League packages in every region 124 . UEFA has split the packages by days of the week and, in general, is aiming for two broadcasters in each country, one pay-TV, one FTA.

Exhibit 22: Premier League rights packages

92/93-96/97 01/02-03/04 04/05-06/07 07/08-09/10 & 97/98-00/01 Live (A)

Live (1) Live (B)

Live Live (2) Live (C) Live Pay per view Live (3) Live (D)

Live (E) VOD (1) Live (4)

Live (F)

Near-live (long form) 1 Near-live Near-live (long form) 2

Near-live clips

Highlights Highlights Highlights Highlights

Mobile Mobile Mobile

Note: (1) Package scrapped in January 2003 Source: TV Sports Markets “World Football Leagues and TV Rights”; Value Partners analysis b) More sophisticated segmentation between FTA and pay-TV packaging

Rights holders are increasingly looking at how they can best exploit different broadcasters (both pay-TV and FTA) to maximise rights values. Trends in the International Olympic Committee’s (IOC) 125 rights sales may illustrate one direction that thinking may be evolving. Traditionally the IOC sold all of its rights to FTA

124 Source: the Guardian, Europa.eu 125 The IOC is not a UK sports right holder, so it is not technically a UK market impact. However, there will be a knock-on impact on the UK- based British Olympics Association

broadcasters to ensure the “widest possible audience” 126 . However, for the 2013 Winter and the 2016 Summer Olympics, the IOC are selling “gatekeeper rights”127 to pay-TV broadcasters in selected countries (e.g. Fox in Turkey and Sky Italia in Italy). The pay-TV gatekeepers are obliged to resell a minimum of 200 hours of the Summer Olympics and 100 hours of the Winter Olympics to FTA broadcasters 128 , ensuring that a core of events remain FTA. This approach has increased IOC revenues in some markets; for instance, in Turkey, Fox Turkey paid €23m for the rights, approximately three times the amount that Turkish state broadcaster TRT was thought to be paying 129 . However, some broadcasters may reduce the value they place on core rights once they lose exclusivity. c) There are a greater number of non-live packages

There is greater demand for non-live packages as broadcasters and other platforms (such as mobile operators) are making greater use of football clips, end of season roundups and longer-form content made available at least a month after the event (e.g. DVD of the “Best of the season” for top Premier League clubs). Highlights remain the most important non-live package.

As an example, the English Premier League rights for the 2007/08 - 2009/10 season consisted of a total of twelve packages of rights, of which six were non-live: six live packages split between Sky and Setanta; two delayed-live packages, won by Sky and BT Vision; a delayed, on-demand clips package won by NTL; a highlights package won by BBC; a mobile clips package won by News International / Sky; and a club rights package owned by the clubs themselves, which allows each of the clubs to use highlights of their matches on their own television channels and websites. Despite these changes, the live rights still comprise the majority of value.

Exhibit 23: Illustrative live rights as a % total sports rights (£m)

Non-live Live % total rights value 85% 98% 95% in live (1) (2) 0.5 103

52 10.6 569

Premier League 07/08-09/10 Domestic test cricket England Rugby Union autumn internationals Note: (1) Five are reported to have paid a nominal fee for highlights (2) Payment for near-live rights Source: TV Sports Markets, Value Partners analysis

126 IOC Olympic Charter, as quoted in http://www.america.gov/st/sports-english/2008/April/20080416111949cmretrop4.587954e-02.html 127 The gatekeeper broadcaster for the IOC buys the entire package of rights, and then breaks it up themselves to sell to other broadcasters or interested parties (e.g. mobile operators) (Source: Redorbit, http://www.redorbit.com/news/sports/459971/ioc_sees_hike_in_20102012_games_tv_rights_revenues/index.html ) 128 Sochi 2014 website, http://sochi2014.com/79038 129 TRT was paying as a part of the EBU, so its precise contribution for the 2010/12 Olympics is not known. (Source: TV Sports Markets, 7 th November 2008)

6.5 Conclusion: market evolution

Major live sporting events remain “appointments to view”, able to attract large audiences at a time when these are becoming harder to obtain. In broadcast, DSO, HD and on-demand should make it more important for PSBs to show sport (as large audiences become rarer and relatively more valuable) and easier for them to do so (due to the channel capacity on digital). In sports rights, bundling live content into smaller packages, differentiating between FTA and pay broadcasters, and the growth of non-live content will increasingly allow rights holders to maximise rents and meet other objectives around reach and sponsorship revenues. With expanded programme propositions for larger competitions there may be a case for listing not an event in its entirety, as may have been the case in the past, but considering which of its component parts need to be listed.

7 Potential for future impact

7.1 Summary • Digital Switch Over will increase the number of qualifying channels with 95% reach and will give PSBs more capacity to show listed events

• Audience fragmentation, increased use of PVRs and eventually on-demand will increase the value of “appointment to view” programming. For PSBs with a commitment to sport, sports rights are likely to take an growing share of their increasingly pressurised programme budgets

• As a result there will be greater competition amongst FTA broadcasters for listed events which will support the level of listed events rights fees in the future

• Regulatory pressure and competitive dynamics will increasingly drive rights holders to disaggregate their rights into smaller packages targeted at both FTA and pay-TV. The case for listing events will increasingly need to consider not just the event but applicability to the components of a particular rights package

• As historically, Listed Events are unlikely to have a significant impact on the dynamics of the broadcast market. Adding new events to the list is unlikely to change this, unless the most valuable properties (such as the Premier League) are listed or a substantial volume of other important events is listed .The Premier League is the most valuable property and any significant intervention here would be likely to have an impact . The listing of a significant number of second- tier (in terms of value) events would, ultimately, damage Sky’s proposition but such a substantial increase in listings appears very unlikely to occur. A major increase in the number of listed events would affect smaller sports channels (e.g. new entrants) before it had an impact on Sky, particularly if the newly-listed events were those most suitable for pay-TV scheduling (i.e. frequent and long-running). Conversely, it is possible that significant delisting could also harm a new entrant; if Sky were able to acquire events such as the FIFA World Cup or the Olympic Games, the scale of the challenge facing a new entrant to attract subscribers might seem much greater.

• The listing of events is likely to continue to have some adverse impact on the revenues of rights holders because they are unable to maximise competition among pay-TV and FTA broadcasters. However, there are so many different factors which affect price, it is almost impossible to quantify the specific impact of listing. Digital Switch Over raises the prospect of increased competition between a larger number of qualifying broadcasters, which may partially mitigate this impact.

7.2 Introduction

This chapter examines the potential impact on both the broadcast and sports rights markets of Listed Events in the future, both with and without change in the events listed.

7.3 Impact of trends in the broadcasting market

Digital Switch-Over will mean that all households are multichannel by the end of 2012, fragmenting audiences across a larger number of channels and increasing the number of channels that qualify to bid for listed events

7.3.1 Fragmentation will increase value of “appointment to view” television like sports

With increasing audience fragmentation and time shifted viewing, commercial PSBs need programmes which can draw large audiences, like sports, as the consumer demand section demonstrates. For PSBs committed to sport, the relative value of sports rights is likely to increase. Sports remains one of the few “appointment to view” genres that can attract large audiences who will watch live, driving audience share both for that

programme and aggregate channel shares in hard to reach male demographics. PVRs are also likely to erode overall advertising effectiveness; however, sports events are well suited to sponsorship, which viewers are less likely to skip. This is likely to increase the value of Listed Events to qualifying commercial PSBs,

7.3.2 DSO will increase competition for Listed Events

After DSO in 2012, all FTA channels on Freeview will achieve 95% reach and qualify to bid for Listed Events. This will increase the competition between qualifying broadcasters for these events; it will increase the scheduling flexibility and capacity of PSBs who wish to bid for Listed Events (they will be able to manage rights across their entire FTA digital portfolio without interrupting core prime time schedules on their primary channels); it could also potentially allow a new FTA sports channel to come into the DTT market, leveraging a mix of Listed and non-listed events. In combination, these should increase the value that sports rights holders can achieve for Listed Events rights.

7.4 Impact of changes to listed events on the broadcasting market

Changes to the list of protected events could have an impact on the broadcasting market, however such changes would have to be substantial for this effect to be material.

7.4.1 Potential for impact on existing pay-TV operators if a schedule of events is listed

Sky’s strong historical growth suggests that it has not been materially impacted by the existing Listed Events regime 130 . Two factors could change this; if the Premier League was listed (Ofcom data suggests that 54% 131 of Sky Sports subscribers to whom football is important would cancel their subscription if Sky lost the Premier League, and they have stated that to undermine Sky Sport’s wholesale position “Sky would need to lose the majority of Live FAPL rights” 132 ) or if a large volume of other events was listed 133 . In practice this is unlikely; there are no proposals to list the Premier League and given the large number of sporting events available to pay-TV and the ability to schedule these flexibly, the increase in volume would have to be substantial before it had a real impact on Sky. Sky’s resilience is demonstrated by its ability to withstand the loss of two of the six Premier League packages (46 matches) to Setanta.

7.4.2 New entrants need to have access to a package of rights

The feasibility of new entrants in pay-TV sports is contingent on their ability to build a compelling portfolio of sports rights. Historically, Setanta acquired not just Premier League rights but also the Scottish Premier League, home nations World Cup qualifiers, the PGA Tour, Indian Premier League cricket and Magners League rugby to create its channel. As for Sky above, if a significant volume of new sports rights were listed, it could undermine the viability of a new entrant, focussing competition on a smaller subset of un-listed rights and pushing up values to an unsustainable level for a new entrant with a small customer base. The sports properties which are particularly important to new entrants are those which are suitable for pay-TV scheduling and relatively inexpensive. The listing of such events could undermine the feasibility of new entrants such as ESPN.

130 Sky Digital was launched in 1998. Source: Digitalsat.co.uk. Subscriber growth data is in Section 6.2, Impact on the broadcasting market 131 Source: Ofcom, Annex 10 to the pay TV market consultation 132 Source: Ofcom Pay TV phase three document , section 5.47 133 Ofcom state that, for Sky Sports 1, “FAPL is the most valuable competition” but “Sky Sports broadcasts a range of content which is highly valued by subscribers” (Source: Ofcom Pay TV phase three document , section 4.80-2). Respondents to the Ofcom pay TV review including BT, Virgin BT, Virgin Media, Top UP TV and Setanta have also stated that while “live FAPL content is very important, other non-FAPL sports are also important in making Sky Sports channels a “must stock”” ((Source: Ofcom Pay TV phase three document , section 4.242)

Conversely, if too many events on the list were de-listed, and Sky acquired many of those events currently protected such as the FIFA World Cup and Olympic Games, a new entrant would face an even harder task in attracting subscribers.

7.5 Impact of trends in the sports rights market

Sports rights holders are now showing more sport than ever before, and are using this volume of content to produce more packages and ensure that there is competition for rights. Regulators, particularly the European Commission 134 , have also put pressure on rights holders to ensure that rights to an entire tournament or competition cannot be bought by just one broadcaster.

7.5.1 Evolution of packages means composition of listed tournaments needs to be considered

Some rights holders are starting to increase the volume of content produced from their competitions and segment their properties into FTA-specific and pay-TV-specific packages to increase value yet ensure public access. Listing an entire competition or tournament would make this impossible. Because of this, there is potential for a greater market impact on rights holders from listing events, making it important that more consideration is given to the cases for listing each of the component elements (e.g. the individual matches) of major events, particularly international tournaments, than was necessary in the past.

7.6 Impact of changes to listed events on the sports rights market

Changes in listed events will have an impact on sports rights holders, primarily on the revenue they receive for their sports rights, although this may be mitigated by broader audiences and increased sponsorship revenues. The greatest impact will be on those sports which are well-suited to pay television, and where the sports rights body relies most heavily on the revenues from these rights. The market impact should be carefully analysed to ensure that there is genuine public value that offsets the potential consequences in the sports market.

7.6.1 Counterbalancing impacts can mitigate some revenue loss

Sports rights holders have a number of aims, ranging from maximising broadcast rights fees to driving participation and interest in their sport. A listed event is likely to have a lower rights price, either because pay- TV would pay most for the rights or because there is less competition for their rights - allowing interested PSBs to lower their bids. Against this, listing is likely to increase television audiences and increase other revenue streams, such as sponsorship. It may also ensure value in the long run - if an event were to be delisted, and existing FTA audiences and thus broadcasters lost were no longer interested in it, then the resulting loss in competition for those rights could decrease prices. If the economic situation for PSBs improves, this is also likely to be decrease the impact of listing on rights holders as the amount PSBs can pay for sports increases. The extent to which revenue loss is offset by the benefits that listing can provide will depend on the event under consideration.

7.6.2 Greatest impact on the sports which are best suited to pay-TV

Sports properties which have a long-running series covering much of the year, where there are a number of events every week, and where the matches are in prime-time or at weekends are most suited to pay-TV.

134 For example, the EC has required the Premier League to disaggregate rights for the 2007/08 – 2009/10 season into six packages, not all of which can be bought by the same broadcaster

Some high-profile examples of those types of sports properties are the Premier League, PGA Tour, and Cricket Test match series; there are also lower-profile examples of the same types of events.

For these events the relative difference between what FTA TV and pay-TV would pay is likely to be greatest. Even if they are currently shown on FTA television, pay-TV is likely to have provided price competition 135 . These properties are therefore most likely to be affected by listing.

7.7 Conclusion

Overall, the evidence above suggests that the negative market impact on broadcasters from listing events is likely to be minimal. Pay-TV has historically grown steadily in the UK despite the listed events regime, and the volume of sport that Sky now has to show is likely to be sufficient in the future to ensure that any one event or a small schedule of events is likely to be substitutable unless it is a key property, like the Premier League. For a new entrant it is possible that there could be an impact from denying them the opportunity to construct a consumer proposition by purchasing a desirable but inexpensive bundle of rights. To date, there does not appear to have been an impact; in the future market impact is only likely if a volume of events are listed. For a new entrant, there is also a benefit to listing events as it prevents an incumbent pay-TV operator buying all sports rights and becoming the only serious option for consumers.

In the sports rights market, it is hard to make generalisations about the impact on a rights holder of listing. While there are benefits of being broadcast on FTA television, it is clear that pay-TV may well be able to pay more for some events and the presence of pay-TV as a bidder is likely to mean that qualifying broadcasters end up paying more. Sports properties which are best suited to pay-TV – long running tournaments, with one- two matches per week in primetime or at weekends – are most likely to be adversely affected by listing. Smaller competitions of major sports, which are attractive to pay-TV and which depend financially on UK television revenues, could also be vulnerable.

135 Explicit competition is where pay-TV has bid against FTA broadcasters to win the rights, and so bid up the price that the FTA broadcaster has to pay. Implicit competition arises where an event has only ever been sold to a FTA broadcaster, such as with Wimbledon. Here pay-TV may well not explicitly bid, but the possibility of selling the event to pay-TV may well encourage FTA broadcasters to put in higher bids

8 Appendix

8.1 New entrants in the UK

There have been three major attempts to challenge Sky’s control over pay-TV football rights:

• Eurosport in 1989

• ITV Digital in 2001, with its purchase of football league rights

• Setanta sports in 2007-08, with the purchase of two of the six pay-TV packages 136

• ESPN in 2009, with the purchase of Setanta’s two Premier League packages (46 matches) for the 2009/10 season and one Premier League package (23 matches) for 2010/11 – 2012/12

None of these have been successful, with ITV Digital collapsing in July 2002 and Setanta as of the date of writing (June 2009) in administration. Each has been accused of overpaying for rights due to competitive pressure from Sky.

8.1.1 ITV Digital

ITV Digital was originally launched as OnDigital in 1998, with up to 18 channels divided between a basic package including Sky One, Eurosport, UK Gold, and numerous Carlton / Granada packages, and premium channels including Sky Premier and Sky Sports 1-3137 , for £6.99 to £38 for all channels. However, Sky competed strongly with the new DTT pay-package, promoting its Sky Digital package with ~200 channels and offering free set-top boxes to subscribers 138 . The extent of this competitive pressure meant that ONDigital’s owners, Carlton and Granada, rebranded ONDigital to ITV Digital in July 2001.

This rebranding was also accompanied by the purchase of Football League rights for 2001/02 to 2003/04 for £315m. The ITV Sports package cost £6.99 per month and included the UEFA Champions League, the Nationwide League and the Worthington Cup. 40 pay-per-view Premier League matches were available for £9.99 per month. 139 However, ITV Digital had markedly overpaid for its rights and failed to acquire the required subscriber base. It went into administration in 2002, owing the Football League £180m 140 .

136 Setanta had already launched in the UK but it was the purchase of Premier League rights that made it a serious competitor to Sky 137 Mediatel, ONDIgital announces Channel packages and launch date , 20/09/98 138 Allbusiness, http://www.allbusiness.com/media-telecommunications/telecommunications/7539623-1.html , 1/06/99 139 Managing Change research website, June 2001 140 BBC, ITV Digital goes broke , http://news.bbc.co.uk/1/hi/business/1896732.stm

Exhibit 24: Football League, UK live rights values per season (£m)

105 88

37 25 24

(1) (2) 95/96-00/01 01/02 - 03/04 02/03 - 05/06 06/07 - 08/09 09/10 - 11/12

Sky ITV Digital

Notes: All deals are for live rights only (i.e. not highlights) to the Football League and also include rights to the League Cup (currently known as the Carling Cup) and the Football League Trophy (currently the Johnstone’s Paint Trophy) (2) Original rights period was supposed to run until 2003/4, however, ITV Digital collapsed in 2002. The rights to the 2002/3 season were then resold and bought by Sky as part a new four-year package (2) Rights purchased jointly by Sky and BBC Source: TV Sports Markets “World Football Leagues and TV Rights”, Press Reports

ITV’s package was overly expensive, and it overpaid for non-Premier League sports rights in an attempt to compete with Sky.

8.1.2 Setanta

Setenta Sports was established in Ireland in 1992. It operates international operations in Great Britain, Ireland, Luxembourg, the USA, Canada and Australia, specialising in football, rugby, cricket, golf, and boxing. In the UK, Setanta runs Setanta Sports 1, Setanta Sports 2, Setanta Golf and Setanta Sports News. These channels are available cross-platform on Freeview, Sky, BT Vision, Virgin Media and online via Setanta-i. Direct subscribers are charged £9.99 / month, and the package is also included for free with certain Virgin Media bundles (e.g. the XL bundle).

Setanta made a serious entry into the UK market when it acquired Scottish Premier League rights in 2004 141 . Subsequent acquisitions were the FA Cup and home nations away World Cup qualifiers and US PGA Golf. The most important deal occurred in 2006 142 when Setanta won rights for 46 Premier League matches for seasons 07/08 – 09/10. These packages were created after the EC intervened to force the FA Premier League to divide live rights into six equal packages of 23 matches, of which Setanta won two. In the aggregate these rights allowed Setanta to construct a viable year-round package for sports viewers who wanted to be able to watch television sport without requiring a subscription to a cable or satellite package:

141 TV Sports Markets European TV & Sports Rights 2008 142 Source: BroadbandTVnews, http://www.broadbandtvnews.com/2009/06/23/setanta-enters-administration/

Exhibit 25: Setanta sporting calendar (number of events per month, 2008)

Indian Premier League Twenty20 cricket Cricket 38 Rugby Boxing Golf 22 13 10 Football 4 4 4 5 9 2 4 9 5 13 2 11 6 15 10 1 23 24 2 10 9 12 8 17 19 19 2 17 7 10 6 8 5 9

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Note: For full schedule see appendix Source: LivesportonTV.com, Setanta, TV Sports Markets, Value Partners analysis

However, Setanta was judged to have overpaid for a number of sports rights. For example, values for its Premier League rights were driven up by the bidding war between Sky, Virgin and Setanta. This resulted in total live rights valued at £569m per season, an increase of 67% over the £341m per season that Sky had paid for 04/05 – 06/07. This amount even surpassed the £430m per season that live rights had reached in the competition between ITV Digital, NTL and Telewest, and Sky for 2001/02 – 03/04 rights:

Exhibit 26: Price of Premier League live rights

BSkyB PPV 569 593 Setanta (1) 53 430 130 60 341 540 168 438 370 341 168

97/98-00/01 01/02-03/04 04/05-06/07 07/08-09/10 10/11 - 12/13 Rights 60 matches 60 matches 138 matches 92 matches 115 matches owner 46 matches 23 matches 44 PPV matches

Reg. - No significant • No significant • Live rights • Live rights • As for 07/08 - condi- regulatory regulatory divided into divided into 09/10 tions conditions conditions four six packages packages of 23 • Sky required matches to sublicence each eight • No one matches after broadcaster winning all could buy all four rights packages, but no bidder matched reserve price

Note: (1) Includes PPV rights Source: ’97 to ‘01 - TV Sports Markets “Who Owns TV Sports Rights in the UK”; ’01 to ’10 - TV Sports Markets “World Football Leagues and TV Rights”, 10 onwards Sportcal

Against these rights costs, the Setanta subscriber base saw only limited growth from 1m direct subscribers in December 2007 to 1.2m in June 2009, after having added 800,000 in 2007 itself. Further pressure was reported to have come from Setanta’s private equity backers, who invested £400m after Setanta won its Premier League rights and were looking for a return on their investment 143 . The combination of high rights costs, limited subscriber growth and little opportunity for future growth, due to the loss of 23 of its 46 matches for the 2010/11 – 12/13 seasons, lead to Setanta running into significant financial difficulties during 2009. These became evident in June 2009 when Setanta defaulted on a payment of £3m to the Scottish Premier League. Amidst speculation of collapse and a refinancing drive, Setanta stopped accepting subscriptions. As this report is being written, Setanta has gone into administration. The Premier League has sold the games it owned to ESPN, who have stated that they are intending to launch a new subscription sports channel on a variety of platforms.

143 Source: BBC news, http://news.bbc.co.uk/1/low/business/8089275.stm

8.1.3 ESPN

ESPN has secured the 46 live Premier League matches (two of the six packages) previously shown by Setanta Sports for the 2009/10 season, and 23 live matches (one package) from 2010/11 to 2012/13. They have announced that they intend to launch a new subscription sports channel on a variety of platforms 144 .

144 Source: BroadbandTV news, http://www.broadbandtvnews.com/2009/06/22/espn-secures-premier-league-rights/

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