This post is one of my articles that explains how it is possible to screw an industry up beyond words with excessive regulation, and the consequences of doing so can occur in unexpected places. The story is in this case about how government attempted to protect the BBC and ended up giving enormous quasi-monopolistic powers to Rupert Murdoch. Next week, I shall post a similar history of the regulation or television in Australia, which explains how government attempted to give enormous quasi-monopolistic powers to Kerry Packer, and ended up giving enormous quasi-monopolistic powers to Kerry Packer.
Until a week and a half ago, British people were watching the European Championship football championship between the national teams of the best footballing countries of Europe, the English in the hope that England would win the tournament, and the Scottish in the hope that England would be eliminated early and embarassingly. Neither of these things happened: England played decently but not spectacularly and were eliminated on penalties in the quarter finals. If England had stayed in the tournament the number of cross of St George flags attached to people’s cars in this country would have steadily increased, it would have been impossible to go into a pub and had a discussion of anything else, national euphoria may have even broken out and, sady, there would have been a somewhat unpleasant yob element on the streets shortly after closing time. As an Australian, I think I would have found that (and the fact that the English would have been gloating for years if not decades) a bit much, so I am glad that it didn’t happen. Instead, I watched the rest of the tournament (which finished yesterday evening) with interest both on television at home and in pubs with much smaller crowds than would have been the case if England were still participating. The story of the tournament was that the large heavyweight countries of Europe were eliminated relatively early, and the teams from the smaller countries excelled themselves.
In yesterday’s final the host nation Portugal (regarded as a good side from before the start of the tournament, although not one of the extreme favourites to win it) took on Greece (who at the start of the tournament were absolute rank outsiders who most people would not have picked to win a match let alone the tournament). And as it happened, Greece won a perhaps a little dull and defensive (but with lots of heart) 1-0 victory, and a team that had never won a match in the finals of either the European Championship or the World Cup before are now champions of Europe. (The slightly desperate question of whether the Olympic stadium in Athens will be complete in time for the start of the Games in six weeks now has the added question of whether the Greeks will have stopped partying by then. I was in Sydney four years ago for the 2000 games, and at this point we were just coming to grips with the fact that the games were almost upon us. We didn’t really start partying until the games actually started.
It was not hard to find a place to watch yesterday’s final, because it was on two terrestrial television channels (licence fee funded BBC1 and advertising funded ITV1) simultaneously as well as satellite channel Eurosport. This followed what happened earlier in the tournament, which is that the matches have been divided evenly between the two broadcasters. Half the matches were on the BBC, and the other half on ITV, and who got to show which matches was decided more or less randomly. Neither network has been able to gain an advantage over the other by advertising itself as “The Euro 2004 channel” or anything like that.
This may seem curious. Why is what should be one of the biggest sporting events of the year on two television stations simultaneously? Given that lots and lots of people are likely to want to watch it (or would have if England were playing) would it not be of lots of value to advertisers and therefore wouldn’t the organisers of the tournament want to make huge amounts of money by auctioning the television rights to the highest bidder.
Well, actually no.
Well, actually probably yes, but this is not permitted. You see, the European Championship is what is known as a “listed” event under the laws that govern British television. There is a list of events that subscription television channels – satellite and cable – are not allowed to bid for. In the interests of the nation, or of small boys living in deprived areas of Liverpool whose parents cannot or will not pay for satellite television, or perhaps in the interests of self-righteous, patronising and meddlesome bureaucrats, or in the interests of members of the House of Lord’s who think it is much too declasse to have cable, or something, these events are only allowed to be on terrestrial television that is free to watch (after you have paid £120 a year that you must pay to the BBC to watch television, even if you want to watch some other channel or just a couple of DVDs at home).
Most sporting events on British television are no longer regulated like this. Most events (including virtually all football between club teams) are not listed, and of these a huge portion are on Rupert Murdoch’s subscription Sky Sports channels. The remainder are on the private terrestrial channels ITV1 and Channel 5, with a few on the BBC and a few on the commercially funded but state owned Channel 4. Some would argue that this proves the need for the “listing” of events of national importance. If the list did not exist, these events would end up on satellite and cable television too, and that would be bad.
Disregarding the question of whether there is such a thing as a sporting event of national importance, and disregarding the fact that this law basically amounts to the theft by the state of whatever money the organisers of the sporting events could have got for the rights if they had sold them to the highest bidder, this is probably true. If Rupert Murdoch’s BSkyB were allowed to bid for the exclusive rights to the European Championship, Wimbledon, the FA Cup Final, the World Cup, the Olympic games and the like, they probably would, and even big events like this probably would would end up on satellite television exclusively. Supporters of the status quo would probably take this concession from me as a concession that the status quo is good, and is necessary. But they would be wrong.
On the other hand, our readers in the US are probably just wondering whether what I have just said is really true, because the most important sporting events in the US generally do not end up on subscription only television. The Super Bowl and the World Series and the NBA finals and the Olympic Games etc generally end up on one of the free to air networks, as they are of more value to networks who want to sell advertising than to networks who want to sell subscriptions. Is this not so in Britain, and if not, why not?
Well, the answer is no, this not so in Britain. As to why not, that is a long story, which isn’t going to stop me from telling it.
Until the mid 1950s, the BBC had a monopoly on television in the UK. The establishment at the time thought that this new medium was such a dangerous and potentially powerful medium that if commercial interests had access to it, they would use it to vulgarise the nation, and therefore it was necessary for people like them to control it and control what people watched. So came the peculiar tradition of the BBC, which was traditionally run by people who considered them too good for the medium they were working for, but did it because as they saw it somebody had to in order to protect the nation from itself. And thus started the BBCs tradition of relentlessly middlebrow programming (that was recycled for Americans and shown on “Masterpiece theatre) for “people like us” (or at least people who aspired to be like us) mixed in with rather ghastly game shows and soap operas for people not like us. (Thankfully, these seldom make it out of the country).
In any event, by the mid 1950s it was clear that there was a problem with this model: not that the BBC had a monopoly on programming (this was generally seen as a good thing) but that there was no television advertising in Britain. You see, this new form of advertising had come into being in other countries, and businesses wanted to be able to advertise on television. (Radio advertising was considered much less important, and as a consequence Britain had no legal radio stations other than the BBC until 1972, something that I find mindboggling). After a few years of arguing over this, the problem was eventually solved by the creation of a new channel named ITV in 1955, to predictions of civilizational collapse by certain parts of the establishment. This new station was funded by advertising, and was in theory owned by private companies, but with a really strange caveat, which was that the owners of the network essentially did not control their own programming. Everything that could be done to prevent the owners of the new channel from gaining any power, and as a consequence a television network was created with an astonishingly bizarre corporate structure.
The United Kingdom was divided up into 14 pieces, and a different company was required to own the ITV franchise in each region. London, Manchester, and Birmingham were considered too big to allow one company to have the franchise, so different companies got to broadcast depending on the day of the week (and later also the time of day). Economies of scale and marketing realities meant that the different regional companies would show essentially the same programming as each other, but an extensive process of negotiation was necessary to decide precisely which of the individual companies got to provide how much programming to the network. The market could have decided this, but this was not allowed, and a government set up bureaucracy came into existence to decide just who got access to how much of the schedule. News was considered much too important for the same companies that theoretically controlled the rest of the programming, and yet another company (ITN) was created to provide news for the ITV companies. This was required to be “impartial” and another set of bureaucrats got to judge this. (As an aside, this rule still exists for all television news transmitted in the UK, and the successor to this body recently ruled that America’s Fox News, which is shown on satellite television, is not “impartial” and it may theoretically therefore be illegal to broadcast it in the UK. But I digress). I government appointed bureaucracy named the Independent Television Authority (ITA,), later the Independent Broadcasting Authority (IBA) and later still the Independent Television Commission (ITC), was set up to regulate the new station.
Now, the licenses to operate the pieces of this new television network were not granted in perpetuity. They came up for renewal ever few years, at intervals that have varied over the decades. At the end of of a franchise period the bureaucrats of the ITA got to decide whether the operators of a licence had satisfied something called a “quality threshold”. If the programming did not satisfy the bureaucrats views of what comprised quality, then the ITA could direct the franchise operator to change its programming, or conceivably could awrd the licence to someone else. And over the years this happened a few times.
And this created exactly what was intended. Commercial television came into being, and advertisers were able to advertise on television. And what all these regulations added up to was that a new bureaucracy had been set up by the government to control the programming of this new commercial networks. Commercial ownership of the network was fragmented. The owners had no certainty that they would control their piece of the network in future, and different regional owners were not allowed to merge with each other. A substantial portion of the profits of the networks (over and above normal taxes) had to be paid to the state, which kept the network poor.
Which is where we get back to the question of sporting rights. The concept of a “listed” event is not actually a new one. It actually came into being at the same time commercial television came into being in 1955. At that point we had two sets of bureaucrats, one running the BBC and the other running ITV. Actually competing for the rights to show things like sport was the sort of thing that these bureaucrats found unseemly. And it could lead to money that could be spent on programming or given to shareholders or the government being given to other people, such as sports administrators. The bureaucrats found it better to divide the rights for such events up between themselves, in much the same way that the rulers of Europe divided up the African continent by drawing lines on a map in Berlin in 1884. Some events (eg Wimbledon) were left to the BBC, but most events were divided up the way in which the European Championship football were divided up. “Listing” was the legal justification for this. A “listed” event could not sell exclusive rights to only one television network, but had to share them. Half the games were given to one network and the other half to the other. This suited the BBC – it was able to spend licence fee money on “important” programming and didn’t have to justify doing things like giving licence fee (ie tax) money to sporting bodies – and it suited ITV, which got a share of the television rights to many sporting events without actually having to pay any significant amount of money for them. And while the BBC and ITV did sort of compete with each other for audiences, it was a strange game they played, becasue ITV had 100% of TV advertising revenues.
And that is how things remained until the 1980s. The BBC got a second national television channel in 1967, but there was a gentleman’s agreement that this would not produce programming aimed at mass market audiences. Things changed a little with the introducation of Channel 4, a second advertising funded channel, in 1982, but even this was subject to a manner of gentleman’s agreements and regulations. For one thing, Channel 4 was (and is) state owned, with a charter declaring that it is to provide programming of interest to audiences less well served by the traditional channels. And again there were bureaucratic stretches designed to prevent it competing with ITV for advertising in any serious way. Essentially Channel 4′s budget was set by bureaucrats, and ITV was then put in charge of selling Channel 4′s advertising. Once Channel 4′s budget had been recouped, ITV got to keep the remainder. (That’s right. If Channel 4 managed too boost its share of television advertising revenue at the expense of ITV, it was rewarded by being forced to give the additional money to ITV).
In terms of sport, this had essentially no impact. Channel 4 did dabble in odd American sports like baseball and foreign football a bit, but that was all. Sport remained largely on ITV and the BBC, which between them provided a pretty feeble selection of sporting events, and with production values that demonstrated a level of incompetence that was hysterically funny unless you were actually trying to follow the sport. (It was not uncommon in the 1980s for television networks in Australia to take the pictures from the BBC or ITV and provide their own commentary. I have one or two recollections of this commentary consisting largely of apologies for the poor quality of the pictures).
Finally, in the late 1980s, things started to change. They were bound to. Internationally (at least outside America) sporting bodies had failed to properly take advantage of television prior to about 1980, but at this point they started to realise that they had considerable bargaining power. Worldwide, the number of television channels available was increasing, and things were changing for there being a limited number of television channels for which it was a privilege for a sport to get its programming on one of them to a world where there were many many channels and only limited audiences. Much of the world had had the number of channels artificially reduced from what was technically possible as was done in the UK, but this was not sustainable, however tried the rent seekers and the bureaucrats would try to maintain the status quo. And in the UK, the rent seekers and the bureaucrats did at least have an enemy. For television rights were valuable, everybody was starting to realise this, and sporting bodies were not going to put up with receiving a pittance for their valuable rights for much longer. And in any event, in Britain the status quo had an enemy.
And that enemy was of course Mrs Thatcher. Mrs Thatcher loathed the BBC almost as much as I do, but she was never really willing to take on the status quo. The political fallout from doing so was simply too great, and the number of people in Middle England who were willing to declare that “Britain has the best television in the world” as if it was something said by God to Moses on Mount Sinai was simply too great. (Even a decade ago you heard this a lot, although I haven’t heard it recently). What Mrs Thatcher was willing to do was to give Rupert Murdoch a relatively clear run to get subscription satellite television off the ground in Britain. Different regulatory decisions in the distant past had prevented Britain from getting cable television in the way that America did, and by the late 1980s a national platform for subscription satellite television was viable.
Whereas in America the companies that created premium cable television channels and the companies that owned the cable networks themselves were largely different from each other, in Britain Rupert Murdoch was able to create a system that owned most of the principal premium channels and the (satellite distribution system as well. (Yes, there were and are some companies in the US involved in both businesses, but it was usually the case that if you were watching cable television the company that owned the channel you were watching was different from the company that owned the cable network). Murdoch and has BSkyB company was able to package his channels in such a way that he maximised his revenues by forcing people to pay for his premium channels, even if they had minority tastes and didn’t really want them (And he was willing to gamble his whole empire on his ability to dominate subscription television in the UK, coming close to bankruptcy in the credit crunch of 1991). And he quite correctly figured out that there was a market for far more sport (particularly football) than was being shown on television, especially if production values were improved dramatically.
Prior to 1990, the amount of club football that had been shown live on British television was quite small, but BSkyB changed this for people who were willing to pay for it. BSkyB paid unheard of sums for the rights to the new Premiership of the top 20 clubs, and provided viewers with several live matches a week. The gamble paid off spectacularly, and by the mid 1990s BSkyB was worth many billions of pounds, was immensely rich, and was able to outbid all other television networks in the UK for any sporting rights it was legally permitted to buy. And it did so.
Meanwhile, things grew worse for ITV. While Mrs Thatcher was not willing to take on the BBC in any substantial way, she did attempt to try to turn ITV into a company that obeyed something like market rules. She proposed that rather than being required to satisfy a spurious “quality threshold” to retain their licences, companies should be simply given the right to bid for the licences once in a while and the licence would be given to the highest bidder. This is one of those arrangements that Treasury likes because it brings in revenue, but for which isn’t ideal for competition, because people will pay more for a monopoly.
However, by the time this came into practice things got worse, because politicians kept amending and complicating the new process (particularly after Mrs Thatcher lost office in 1990) and the auction that took place in 1993 ended up applying both a financial auction at the same time as a “quality threshold” question. Companies were forced to bid large amounts of money for the quasi-monopoly licences, because they were sure to lose their licences if they didn’t, but they could still be disqualified almost arbitrarily if bureaucrats didn’t like them. This left us with an ITV that was owned by companies that had a lot of debt, but which still didn’t especially control its own destiny.
However, there were other things in the 1993 change in the law that did lead to greater competition. Channel 4 was still state owned, but was now entirely independent of ITV, and was allowed to keep the revenues from its own advertising. Since then it has behaved far more like a normal company than it could before. And the 1993 bill also allowed some mergers between regional ITV companies.
By 1995 BSkyB was an enormous success, and the terrestrial sector and even the bureaucrats that ran it knew that their real enemy was BSkyB and Rupert Murdoch. It became clear that Britain had no commercial television companies that could compete in a globalised market, due to the fact that regulation for the previous 40 years had been specifically designed to prevent them from being able to compete. In addition, many of the ITV companies had bid so much in the previous round of franchise auctions that they could barely afford to service their debt. To bail them out, the regulation of ITV was relaxed even further, the merger rules were relaxed further, and no government has felt the need for any further “quality threshold” tests since then (although they are technically still on the books). This process culminated this year with all the major ITV companies finally merging into a single company.
This was expensive and time consuming, and the resulting ITV plc has lots of debt and little capital, particularly after an expensive attempt four or five years ago in which the two largest ITV campanies attempted to take on BSkyB at its own game by buying sporting rights and selling subscriptions to a sports channel that eventually foundered due to the fact that BSkyB had the rights to the most popular events already, that BSkyB had much wider distribution, and that ITV had lousy management and BSkyB had outstandingly good management, it means that the resuliting ITV Inc. has large quantities of debt and a limited ability to compete.
But, finally, ITV has a fairly sensible ownership structure, (mostly) has control of its own programming, is listed on the stockmarket as a single company, and is generally the sort of television company that exists in fairly competitive markets. Except that it is broke. On the other hand, given that ITV had had 50 years of regulation that was specifically designed to keep it broke, to contol its programming, and to prevent it from getting decent management, none of this is perhaps surprising. On the final merger into a single company earlier this years, institutional investors insisted on sacking the mangament. I do sympathise, but it didn’t really help. The legacy of 50 years is too much.
One other change occurred in British terrestrial television in the 1990s. In 1997, a fifth terrestrial station was finally launched in the UK. This was from the start regulated in an entirely sane way. The licence was given to a single company for the whole country, with relatively few restriction on its programming. However, it was a new channel started up with relatively little capital that had to establish an audience, and its programming was on the whole fairly “cheap and cheerful”. Channel 5 is profitable, and great for that portion of the viewing audience that wants to watch programs late at night in which people wear relatively few clothes, but it presently lacks the money to really compete for mass audiences.
Which is where we come back to the original question. Why would Rupert Murdoch’s satellite channels win the rights to all the listed sporting events if the rights were sold on the open market? The reason is simply that BSkyB is very rich, and the private free to air terrestrial networks are very poor. Whereas in the US the privately owned free to air networks are rich and can more than compete in an auction for rights, in the UK BSkyB will always win. The reason why the private free to air terrestrial networks are very poor is that 50 years of regulation designed largely to prevent them competing with the BBC and operating in an open market has kept them poor, and it did so quite deliberately. In the end, this regulation backfired, which is why Rupert Murdoch and satellite television gained the immense power that it has in Britain today.
From time to time the European Competition Commissioner looks at the immense pile of television rights held by BSkyB and suggests that it would be good if they weren’t all in the hands of one company. However, auctions always end up the same way, with BSkyB winning everything it wants. Talk of compeition law being applied comes up, but sporting bodies then become unhappy. For the problem is that BSkyB is the only company with any money. Not so much can really be done.
There is only one way in which the terrestrial networks will ever be able to compete with BSkyB in these sorts of situations, and that is if one or both of the two privately owned networks ITV and Channel 5 is bought by a new owner with very deep pockets. This means a foreign media conglomerate. As it happens, Britain was compelled by EU law to open up ownership of its media to investors from anywhere in the EU. Britain decided that if Germans and Greeks were allowed to own its terrestrial TV stations, then there was nothing wrong with them being owned by Americans or Brazilians either, and the law was changed last year to remove most foreign ownership restrictions. Therefore, it is now possible for an American media conglomerate to buy a British television station, recapitalise it, and then compete in a big way.
At least it is in theory. But in practice it is not going to happen in the short term. American conglomerates have other things to do with their money, and entering the British market would mean competing with Rupert Murdoch, very expensively. And nobody really wants to do that.
So for now it we watch premium sport on BSkyB most of the time, except for the occasional listed event that is shared between the BBC and ITV. And even these are declining in number, for sports are being slowly removed from the list, due to the fact that administrators and athletes want the money. And one tends to think that the listing system wouldn’t stand up in court if anyone really wanted to contest it.