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Is the Sky the limit for SKY’s pricing of Sport?

The refusal of the SKY/Vodafone merger distracts from where the real monopoly power lies. New Zealanders’ love of rugby and cricket means that the owners of those broadcasting rights have a “natural” monopoly. But the real market power is being exerted by the players – everyone else in the chain is just a middleman.

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It’s pretty standard economics that a monopoly can pretty well price what it wants for its product, the only constraint being the elasticity of demand from customers. If demand is totally unresponsive then the SKY’s the limit. By contrast, a supplier that faces competition cannot charge a price that is above the marginal cost of producing the product. To do so would incur a loss.

A monopolist though will charge the marginal cost plus whatever premium above reflects that point at which the loss of revenue from customers cancelling, exceeds the additional revenue gleaned from the customers remaining. The less responsive customers are to price hikes, the higher that price will be. But for sure it’s the reluctance of customers to cancel that is our own worst enemy. The monopolist charges what the market will bear and the additional profit that accrues over and above a price that’s equivalent to marginal cost (the competitive price) is called economic rent – or the monopolist’s surplus.

So can’t do without your sport? Then be prepared to be price gouged.

The marginal cost for SKY is a bit of capacity on a satellite feed, a dish, some wires and whatever it costs to purchase content. This is the competitive price they would charge a consumer. In the case of SKY the only content of much value is sport – and particularly the sport that it has exclusive rights to and for which there is substantial demand – the rugby and cricket.

The true monopolists here are the vendors of that content – NZ Rugby and NZ Cricket. SKY, for all intents and purposes is just the middleman because the sports bodies could sell their content to a multitude of transmission agents and let competition between them sort out what consumers pay to view. But the sports bodies choose to sell exclusive rights clearly because they feel their revenue is maximised that way – and from that the payments to the players and presumably from that, the depth of the talent pool clambering for places in the premium teams and hence the quality of the sport played and enjoyed by viewers.

But the emergence of much cheaper viewing content available on subscription has tested the strength of that sport monopoly. Clearly SKY is losing customers as more and more folk have felt the c.$100 per month (depending on the package) is just too far out of the ballpark for them now that Netflix etc can provide world class content for $12 per month. Of course it’s not sport but there is certainly a degree of substitution going on and the audience for SKY’s monopoly-priced sport is now being pared back to the hard core sports viewers. And their numbers are considerably less than the total audience that would have watched had there still been no other attractive viewing options. A $12 Netflix option has killed the appeal of a $80 SKY Sport option for significant numbers. They are likely to be even harder hit now that Netflix have done a deal with Spark – which of course the Commerce Commission can’t control as Netflix are a foreign firm.

Such a reality has whacked SKY – profits are falling, the value of the firm decreasing. In the face of this onslaught what does it do? Hold on for grim death and ‘discover’ what the true demand for sport now is in this new environment, invest in the infrastructure needed to enable its sports offering to be accessed to include the online option (which was the point of the Vodafone merger), write off the satellite dish investment, or lower the price to stimulate demand?

The maths of this is complex with a lot of unknowns around the customers’ true demand and hence price tolerance – which is changing all the time as new technologies and content emerge, and tastes change. But don’t rule out the possibility that the ‘holding on for grim death’ scenario will end up with SKY not being able to pay so much for “exclusive rights”. And that then puts the decision of what to do right back to the sports bodies who are after all, the originating monopolists here.

With lower revenue you’ll get lower pay for players, and the state of the game in New Zealand could fall away as more of the best players leave for greener pastures either overseas or beyond the game. These are the scenarios for a monopolist whose pricing power is dissipating. It would also be the likely outcome from Winston’s proposal for all international games to be free to air. That would leave hawking themselves out to international venues as their only serious revenue raising option. Under Winston’s proposal you should expect more All Blacks tests in Hong Kong, Singapore and Chicago folks.

Perhaps however there is a more rosy alternative? By dropping the “exclusive rights” condition the sports bodes could well discover that through competition between broadcasters, the pricing to the consumer comes down and demand rises again – back towards what it once was, before those pesky other content providers came on the scene. If the number of less-than-diehard watchers of sports who are leaving in droves at the moment, come back into the fold then overall revenue and profit could stabilise and even recover.

The reality is the market has changed on the sports body monopolists – sport is not the beginning and end of existence for many New Zealanders. We still like it, but not at any cost so if get you pricing closer to that of the non-sport content and we will return. Satellite-alone SKY Sport may well be a dead letter now, but whether that means player payments in New Zealand are set to plunge, comes down to the willingness of the Rugby Union & NZ Cricket to find out whether the more casual market for their product has become an abandoned vein of gold.

They will come searching, the issue is only how many more customers SKY has to lose for the penny to drop.

Image by Sarah Stewart via Flickr

Showing 12 reactions

  • Steven jones
    commented 2017-03-07 06:57:36 +1300
    Depends on the monopoly Bruce, I consider the present electricity market operates effectively as a monopoly and lacks resilience so its both a negative impact on our economy and a risk to it. In this case then its very important that this Government granted monopoly is broken both to reduce cost to people and businesses but also made more robust. Sky in comparison is a non-event it failing due to say a dry year is a non-event.
  • Bruce Thomas
    commented 2017-03-06 21:01:20 +1300
    Fair comment Steven. Original article was more about monopolies, but we seem to have diverged to Sky in particular.
  • Rosemary Jorgensen
    commented 2017-03-06 16:25:28 +1300
    When will someone be brave enough to film sports like the Coast to Coast, the Godson challenges. We live in a very scenic country with amazing sports people doing great races, and we barely see them on anything. the sports I love are skiing, skating, cycling, swimming and adventure sports. No-one shows them anywhere
  • Steven jones
    commented 2017-03-06 11:56:48 +1300
    Frankly I do not care about Sport/Sky and why should TOP?
  • Steve Cox
    commented 2017-03-04 14:52:37 +1300
    Here in Christchurch we have local TV showing schools rugby – one game a week. I don’t know if they pay or whether it’s a scratch each others back arrangement.
    SKY show lower tier games below All Blacks & Super Rugby. Is that part of the deal? By showing many layers of rugby games as part of their monopoly deal it can help provincial rugby who get a cut of the fee.
    If NZ Rugby were to open up broadcast rights would it be a benefit? Maybe two broadcasters cover All Blacks & Super Rugby with no-one bothering with the lower levels? Do we want twice as many cameras scattered around the pitch?
    Perhaps it is time to look at alternatives to the monopoly broadcaster, but heaven help the NZRU administrators who make that call and find they’ve drastically cut their income. Better the devil you know …
  • Alan Christensen
    commented 2017-03-03 20:37:29 +1300
    Sky have an online option for sport in fanpass.co.nz. They just don’t seem to promote it much.
  • Ethan Harding
    commented 2017-03-03 17:25:44 +1300
    Dosent explain the fact that even with vodpahone why they continue to price gouge , im sorry i refuse to pay the best part of 80-140 bucks to watch substandard content that isnt even 1080 p (they use 720 and market extra for 1080 as the hd ticket, WE HAVE THE TECHNOLOGY people dont even get me started on 4k or 3d content) when there are just simply better options like netflix , kodi , amazon prime or just going to the pub to watch it, too late and out of date for the time we live in
  • Gordon Ngai
    commented 2017-03-03 15:39:03 +1300
    I had been Sky customers for more than 10 years and had switched to Vodafone when the sky content is available. The fibre technology is more reliable and cost effective than the wireless method of transmission. I don’t understand why the merger is not approved – this is the only way Sky can reduce the cost by getting rid of the expensive wireless operation.
  • Steve Cox
    commented 2017-03-03 15:26:51 +1300
    Old photo. Carisbrook and is that “Chemical” Ali is the centre?
  • Oliver Krollmann
    commented 2017-03-03 13:32:10 +1300
    I’m interested in only a very limited number of sports, and I can live without seeing them live, so I’ve never considered paying for one of the overpriced Sky Sport packages, and as long as this is the only option they will never see me as customer.
    What I would like to see is a true on-demand offering for sports, or a subscription that is configurable to include only (or at least mostly) the content I’m interested in, for a fair price. Say I wanted to watch (or record and watch later) this weekend’s Rugby Sevens tournament in Las Vegas. I’d like to be able to buy just that content, pretty much like a Box Office movie, watch it live, or record it and be allowed to keep it for a reasonable time frame (say at least two weeks). That I’d be happy to pay for.
  • Bruce Thomas
    commented 2017-03-03 13:26:30 +1300
    Have to admit to a good dose of Schadenfreude regarding Sky’s predicament. Years of price gouging and crap customer service have left them with little subscriber loyalty. They were monopolists as well for many years, and now there is competition they are in trouble. Too bad.
  • Oliver Krollmann
    followed this page 2017-03-03 13:24:21 +1300