When "Competition" is Bad for Consumers: SingTel, the UEFA Champions League and the Economics of PayTV in Singapore

It has recently been reported that SingTel has won the rights to broadcast the UEFA champions league ("SingTel's UEFA coup a boon for fans?") on its new payTV offering, Mio TV, competing the programming rights away from ESPN Star Sports which broadcasts on Starhub's Cable TV.

This seems like good news to consumers - the prospect of increased competition might cause pay TV prices to drop. Indeed, the TODAY article continues to make the following comments:

And with three pay-TV broadcasters — the third being StarHub CableVision — now battling to bring English football and Uefa action to Singaporeans, fans are cheered at the prospect of improved content and lower subscription prices.

Said wealth manager Kelvin Tan, 28: "This should lead to more competitive rates. For a long time, there was only one player (ESPN Star Sports) in the market and viewers paid for a product that sometimes delivered a less-than-satisfactory standard of coverage."

However, these comments are misleading and demonstrate a lack of understanding of pay-TV economics; indeed, the propect of greater "competition" in the pay-TV market results in higher prices for consumers and greater inconvenience. Let me explain:

1. "Competition" causes the cost of programming rights go up, and this higher cost translates into higher retail prices for the consumer.

It is no secret that the three-way bidding for the English Premier League football broadcasting rights between SingTel, ESPN and StarHub caused the price of the programming to go up. StarHub eventually won the bidding war but was unable to keep the retail prices of the EPL programming constant, because the cost of its content had risen significantly. As a result, subscribers saw the amount they paid for the content go up.

Competition for the programming rights causes prices to go up simply because the content rights owner is able to exert its monopoly power over the programming and play the bidders off against each other in order to drive prices up. In contrast, if there were only one bidder at the table, that bidder would be able to exert counter-monopsonistic bargaining power in order to keep the cost of programming to a minimum. If the single bidder then passed this cost savings on to consumers, consumers would benefit with power prices than in a competitive bidding situation.

But in a three-way bidding war, the cost of programming always goes up, and the retail price of the programming can never be lower than in the case of a single payTV provider. This is even more aggravated when we have a player like SingTel in a 'must win' situation, trying to break into the pay TV market in Singapore. Such a player is willing to bid for the content at a non-profitable price in order to break into the market, thus sending the cost of content much higher than it should be.

2. Consumers now have to subscribe to multiple pay TV services (and pay more) to get the same content as before.

Die-Hard football fans who want to watch both the EPL and the Champions League now have to subscribe to BOTH Starhub CableVision AND Mio TV in order to get their entertainment, whereas before when ESPN was broadcasting the Champions League, a consumer only had to subscribe to ONE plan.

Now I don't care how much either payTV operator lowers prices, the NET COST to the retail consumer is definitely going to be higher if he subscribes to both plans than if he subscribed to just one plan. The reason is simple: the consumer now has to pay BOTH to rent the Cable infrastructure that Starhub has rolled out AND he also has to pay to rent the IPTV infrastructure that SingTel has rolled out. This is because the main cost of deploying payTV networks is the cost of deploying the communications infrastructure to the home of the consumer.

The marginal cost of distributing extra content over the same infrastructure is very low (close to zero). However, the cost of building an alternative infrastructure is, well, just about doubles the cost to the consumer. The consumer is unable to enjoy the benefits of economies of scale that would be available to him via a single payTV operator and his cost of programming goes way way up.


3. So What's the Solution?

If competition results in higher costs (and thus higher retail prices) than a monopoly (in this case this is an industry structure of a natural monopoly), yet consumers feel that they are not getting the best prices and best services through the monopoly, the solution is not more competition but better regulation. Regulatory bodies like consumer watchdogs and the Infocomms Authorities should step in to regulate the final prices and the quality of service in order to ensure that consumers are not short changed and that payTV operators get a fair return on investment.

But competition at the broadcast part of the value chain is definitely bad, it drives the cost of programming up. This is because the real monopoly - the monopoly over the program rights - is not broken by the introduction of competition at the distribution end of the value chain.

For me, the news of SingTel winning the rights to the Champions League is definitely bad news because in slightly over a year's time, I will not be able to catch the CL at home without paying significantly more than I currently am for my football entertainment.

Hence, I find it rather weird that people like Kelvin Tan and the writer of the TODAY article think it is good for them. This is a clear case where a company like SingTel has been able to hoodwink consumers without doing much.