Sports over IP: Dynamics and Perspectives by Emmanuel Blain Ing. Dipl., Ecole Polytechnique (2008) Submitted to the Engineering Systems Division in Partial Fulfillment of the Requirements for the Degree of Master of Science in Technology and Policy at the Massachusetts Institute of Technology June 2010 © 2010 Massachusetts Institute of Technology. All rights reserved Signature of Author...................................................................................................................................... Technology and Policy Program, Engineering Systems Division May 7, 2010 Certified by ...................................................................................................................................................... Charles H. Fine Chrysler LFM Professor of Management and Engineering Systems Thesis Supervisor Accepted by ..................................................................................................................................................... Dava J. Newman Professor of Aeronautics and Astronautics and Engineering Systems Director, Technology and Policy Program 2 Sports over IP: Dynamics and Perspectives By Emmanuel Blain Submitted to the Engineering Systems Division on May 7, 2010 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Technology and Policy Abstract Technological advances are allowing the use of the Internet Protocol and the Internet infrastructure mainly built by cable and telecom operators for broadcasting purposes in the U.S. This disruption raises a business issue for the existing value chain, as new entrants are upsetting the existing value chain for video delivery. This thesis will focus on the implications of online video delivery for Sports content in the United States. The general question that is addressed in this thesis is: How would a shift toward Internet­based delivery systems influence the current value chain for Sports broadcasting? Case studies will first show that the broadcasting industry is prone to disruption, and that online video delivery has the potential to upset the existing value chain, and the business models associated with it. The question can be then divided into three sub‐categories, which deal with the technical issues, regulatory needs, and business model changes that Sports over IP may cause – which are explored in separate chapters in the second part of this thesis. In the last part of the thesis, a system dynamics model is used to study the technological and regulatory conditions under which the market will tip towards predominance of broadcasters by content owners in the post‐disruption value chain. Building the model with the standard procedure (described in the thesis) will give insights on what the main dynamics are, and how interrelations and feedbacks among those main dynamics can influence the whole system. Thesis supervisor: Charles H. Fine Title: Chrysler LFM Professor of Management and Engineering Systems 3 To Pauline, for her understanding, patience and love. 4 Acknowledgements This thesis is the conclusion of a fantastic two‐year‐long journey. And like other journeys, it is the people that I met and shared with that made this experience meaningful. First, I would like to thank all the Technology and Policy Program staff, in particular Sydney Miller and Ed Ballo, for their help and availability during those two years. I would like to thank all the teachers of the program, and the students and friends who journeyed with me in Cambridge. I would like to thank warmly all the members of the Communications Futures Program who accepted to give me some of their precious time; more specifically Bill Lehr and Dave Clark, who helped me think about the policy implications of Sports over IP, Steve Bauer for the technical part, and Marie‐José Montpetit and Henry Holtzmann who helped me think about piracy implications and business models. I would like to give special thanks to Natalie Klym, who has introduced me in the CFP, helped me forge the music case study, and above all, has always been available and willing to help me. Without her, my two years at MIT would have been very, very different. I would also like to thank all the people that gave me feedback on my Systems Dynamics model, and accepted to devote lots of time when I needed it; in particular Kawika Pierson and Prof. P.J. Lamberson. I also owe a great debt to Chintan Vaishnav, who has helped me tremendously in the modeling process. I am immensely grateful to thank Prof. Charles Fine, who has agreed to supervise my work. Dear Professor Fine, these two years have been the most exciting of my professional life. Not only have you given me the chance to work on a topic that is at the heart of my interests; you also have been a continuous source of motivation and inspiration for this project. Now I know myself what it is to have the benefit of standing on the shoulders of giants. This journey has not only been an intellectual one, but also a personal one, far away from my roots. My biggest thanks go to my family; and particularly to my fiancée, Pauline. Two years ago, I had to risk a lot for MIT to happen; yet all I have met when the time came for me to make my decision has been support and encouragement. Words cannot describe how grateful I am to you, Pauline. It is you that allowed me to realize this dream. Thank you. This work contains all the energy that you gave me day after day during those two years. And it is for you. 5 Table of contents Introduction .............................................................................................................................................. 10 Chapter 1. Sports broadcasting: from over‐the‐air to the Web .......................................... 14 I. 1939‐1970: The development of a business model..................................................... 14 II. 1970‐1985: The acceleration and the development of cable networks............ 18 III. 1985‐2005: The explosion of the offering and the advent of Internet............. 22 Chapter 2. Music over IP: how the Internet has already disrupted other sectors of entertainment and media.................................................................................................................... 29 I. A brief history of the transition to “Music over IP”...................................................... 30 II. Post‐disruption developments: 2000‐2010...................................................................... 35 Chapter 3. Technical Challenges associated with the development of Web TV........... 45 I. Distinction between Web TV and IPTV................................................................................. 45 II. Development of Web TV ............................................................................................................ 47 III. What do we need to achieve Sports over IP ? ................................................................. 51 IV. The broadband incentive problem ...................................................................................... 58 Chapter 4. Early implementations and challenges of Sports over IP ............................... 61 I. Value chain dynamics for traditional Sports broadcasting.......................................... 62 II. Why Sports over IP is a disruption to the traditional cable TV model .............. 69 III. 3 different business models................................................................................................ 77 Chapter 5. Sports broadcasting: regulatory challenges and opportunities of IP‐based delivery systems...................................................................................................................................... 84 I. Premises for regulating Sports broadcasting................................................................. 85 II. How cable regulation history led to imperfect competition .................................. 88 III. The protection offered by the Sports Broadcasting Act is no longer adequate in today’s broadcasting landscape.............................................................................................. 95 IV. The shift to IP‐based delivery systems is an opportunity to create new competition........................................................................................................................................... 99 6 Chapter 6. The System Dynamics Standard Method............................................................. 105 I. Problem statement ..................................................................................................................... 105 II. Justification of the use of System Dynamics................................................................... 106 III. The System Dynamics Standard Method ....................................................................... 108 Chapter 7. System Dynamics model for Sports over IP....................................................... 111 I. Boundaries of the model .......................................................................................................... 111 II. Presentation of the key loops ............................................................................................... 114 III. Full System Dynamics Model .............................................................................................. 125 Chapter 8. System Dynamics findings and policy recommendations ........................... 127 I. System Dynamics Findings.....................................................................................................