Access Pricing to a Digital Broadcasting Platform

Abstract

This article studies a television market where operators can sell access to programs and to advertising time. First, we determine the retail prices paid by viewers and advertisers to a monopoly platform when there are externalities between these two markets. We compare the prices that an unregulated platform would establish with the welfare maximizing prices. Second, we obtain the access charge that an independent programmer should pay to a television platform for using one of his channels. We show that the optimal access charge takes into account the direct cost of access and the platform's opportunity costs in the viewer and advertiser markets, which are affected by the externalities between the two markets.

ACKNOWLEDGMENTS

This research has enjoyed financial support from Universidad Complutense de Madrid, the Spanish Association of Electronics, Information Technologies and Telecommunications Firms (AETIC), and from the Spanish Ministry of Science and Technology (BEC2003–01679). Germà Bel also acknowledges financial support from the Fundación Rafael del Pino.

This article was written while Germà Bel was Visiting Professor in Cornell Institute for Public Affairs at Cornell Univesity, and Joan Calzada was visiting the Tanaka Business School at Imperial College. Hospitality of both centers is gratefully acknowledged. We are thankful for comments from participants at the International Complutense Seminar on the Economics of Information and Communication (Madrid, 2004) and in a seminar at the Research Unit on Public Policies and Economic Regulation (PPRE—University of Barcelona). Very useful comments and suggestions were received from three anonymous referees and the editor.

Notes

Concentration of ownership in the media industry was studied by Chan-Olmsted and Litman (1988), Chan-Olmsted (1996), and Wildman, (1998). The works of Albarran and Dimmick (1996) and Peltier (2004) contain empirical studies on this issue. Parsons (2003) offered a review of horizontal integration in the cable television industry.

Caffarra and Coscelli (2003) explained that antitrust authorities consider the financial consolidation of the sector as inevitable and try to control the process by imposing conditions on mergers. Some recent studies show that the concentration processes in the audiovisual market do not necessarily diminish welfare (Anderson & Coate, 2005), and that concentration can bring benefits, such as an increase in the product variety offered (Berry & Waldfogel, 2001). Other papers have challenged this result. Cunningham and Alexander (2004) showed that concentration would reduce per-viewer advertising prices and decrease welfare. Goolsbee and Petrin (2004) indicated that a concentration process in a particular platform (i.e., cable television) can be compatible with the existence of effective competition from other platforms (i.e., satellite broadcasting). On the other hand, Mullainathan and Shleifer (2005) showed that competition among news providers does not eliminate media bias. The determinant of accuracy is not competition per se but consumer heterogeneity.

The FCC even envisioned channel brokers, who would accumulate leased channels and sublease them in groups. See a more detailed explanation in Federal Communications Commission (1990).

See, for instance, introductory remarks on the Website of Leased Access Programmers Association (LAPA), www.leasedaccess.org

Cunningham and Alexander (2004) were the first to explore advertising elasticities in the television market, taking into account the switching-off behavior of viewers in response to increased advertising. In contrast to Anderson and Coate (2005), they predicted that an increase in concentration leads broadcasters to increase advertising shares. The increase in commercial time, relative to the volume of content, drives away viewers and raises the subscription fee that subscribers pay and the per-viewer advertising price to advertisers. On the other hand, Brown and Alexander (2005) presented an empirical paper that shows that markets with greater concentration charge more for advertising and attract more viewers.

See Rysman (2004) for an approximation to this type of market.

Corden (1952) is the first paper that analyzes the relationship between newspapers’advertising and reader markets.

According to Evans (2003), in these cases the presence of such a platform generates an increase of welfare when: (a) there are different groups of consumers, (b) the members of a group benefit from having their demand coordinated with one or more members of another group, (c) an intermediary can facilitate this coordination more efficiently than can bilateral relations between the members of the group. Dewenter (2003) offered a detailed review of the theoretical and empirical literature that analyzes this problem in the mass media.

Rosse (1979) explained that “the interdependence of the newspapers firm's two markets—advertising and subscriptions—is the source of what is sometimes called the ‘infamous downward spiral.’ It is this effect that makes being the ‘junior paper’ (smaller circulation paper) in a two paper market precarious. This is also the effect which sometimes accounts for the demise of newspaper competition among quite large newspapers even when differences in circulation are apparently small” (p. 456).

According to Peitz and Valletti (2004), pay-per-view Canal+ in Spain is 7% financed by advertisements. On the other hand, there are several IPs such as Media Park, Buzz and Natura that are partly financed with advertisements.

Peitz and Valleti (2004) assumed that announcers can reach all consumers.

In this article, we don't analyze the possibility where the incumbent is interested in offering access to his rivals. Sappington and Unel (2005) explained that industry producers can employ privately-negotiated input prices to exploit consumers. The input buyer may agree to pay a high price for an input because the high prices serve to reduce the intensity of the retail price competition. However, retail price regulation, multiple potential entrants, and retail product heterogeneity can limit the extent to which privately-negotiated input prices can be used to disadvantage consumers. The authors also showed that when the incumbent has lower downstream costs than the entrant the firms will not conduct input price negotiations.

Complete reviews on access charges in telecommunications can be found in Laffont and Tirole (2000), Armstrong (2002), and Vogelsang (2003). Many insights of this literature can be directly applied to other sectors such as gas, rail or postal services, where the access problem is also very important. Indeed, compulsory access to essential facilities is one of the central features of recent regulatory policy in many network industries, as pointed out by Kearney and Merrill (1998) and Spulber and Yoo (2003).

See Calzada (2003) for a more detailed analysis of this type of access.

In Spain the pay-per-per view channels and platforms compete with many free-on-air televisions. Moreover, there are several pay-per-view platforms that use different broadcasting technologies: Digital+ (satellite), MTV (satellite), cable operators, Imagenio (TV on ADSL), and digital terrestrial television operators. In addition, there is an important number of independent programmers such as Expansion TV, Canal Barça, Factoría de Ficción, Canal Cosmopolitan, Eurosport News, Planeta 2010, Meda Park, Buzz, Natura, Odisea, Club Super 3, and so forth.

See Spanish Telecommunications Regulatory Agency (2003, 2005).

In fact, after the merger was approved, Digital+renegotiated agreements with Astra and Hispasat satellites to broadcast its programming.

The PRI-X is a price cap mechanism that controls the evolution of the price of one service, or the weighted average price of a basket of services. This price cap requires that a regulated firm update its prices according to the Retail Price Index (RPI) minus afactor X that reflects the productivity of the industry. When the factor X is higher than the RPI, this implies that at the end of the regulatory period the regulated firm must reduce its prices. In Spain, in 2003 the government established a PRI-2 over Digital+.

It was just required that wholesale services should be offered in fair, transparent conditions and that the access charges should be cost oriented. In practice, the bargaining process with the IPs must include factors such as the costs of the satellite spot, equipment amortization, and an adjustment based on fee per subscriber.

In the case of a cable platform, the capacity depends on the number of circuits of optical fiber installed. In a satellite platform, the capacity depends on the terms of the agreement with the satellite operator.

Dukes and Gal-Or (2003) modeled how the preferences of the firms for the advertisements are originated.

Brown and Cavazos (2005) conducted an empirical study that shows that advertisers prefer the programming content that best “frames” their advertising. As a result, some programs receive a premium, while others receive a discount.

Some comparative statics can be conducted applying the implicit function theorem, but the complexity of the results makes their economic interpretation difficult.

It will be straightforward to consider the case where the IP contracts the two channels. Indeed, this would imply the vertical separation between wholesale activities and the broadcast of programs.

For simplicity, we do not present the conditions for the optimal retail prices, but an intuition about their structure could be obtained from the first order conditions in the Appendix.

When the two channels of the platform can be leased by the IPs, in a symmetric equilibrium the market shares of the two channels become V ₁ = V ₂ = 1/2 and A ₁ = A ₂ = 1/2. In this situation, the equations about the optimal retail prices and the capacity charge can be substantially simplified because the externalities between markets are compensated.