Does the pay-TV model make economic sense?

In the latest of a series of regular blogs from partners The Blizzard – The Football Quarterly, Tsjalle van der Burg asks whether the pay-TV model actually makes economic sense in Issue 18…

In the Netherlands, we have a pay-TV ban for nearly all important matches featuring Dutch football teams. For instance, all Champions League matches played by Dutch clubs must be free-to-view. The only exceptions are live games in our domestic league, which are on subscription TV. But government regulation ensures that the extended highlights of these games are broadcast for free at convenient times. For the popular Sunday matches, this means around seven o’clock in the evening. Yes, indeed, when all children can watch football, the youth departments of football clubs flourish and you get a better national team.

Most other countries give more room to pay TV. The UK and Spain are in the leading group, but the Italians may be on top. They never transmit more than four minutes of Serie A highlights per day on free-to-air TV, so that many fans feel compelled to pay heavily for watching extended highlights or live matches on pay TV. But why should people pay hundreds of euros a year to watch the people’s game? It seems a bit strange to me. I prefer my country, the Netherlands.

Still, my country also has a problem. Because foreign clubs receive a lot of money from pay TV, Dutch clubs are falling further behind financially and so their teams are becoming weaker. Of course, we are a small country and the problem that our top clubs have lower revenues than the top clubs from large countries also existed in the days before pay TV. We have always seen our most talented players move to larger countries with richer clubs and weaker youth development programs. But in the past, many of these players did so only after bringing a European trophy to Rotterdam, Amsterdam or Eindhoven. At present our most talented players leave us at a much younger age, as foreign clubs now pay them still many times more than they did in the past – and this is to a large extent the result of pay TV. Thus, our big victories in Europe are becoming a thing of the past. If Arsenal were to meet PSV next year, it would be almost certain that the Gunners would win over two matches. Quite boring, even for Arsenal fans.

To give Arsenal fans more excitement, the Dutch government could of course remove its pay TV bans – so that our clubs could earn more money and improve their squads. But really, that would be asking too much of the Dutch. It’s better to have the EU introduce a pay-TV ban for all important live matches and highlights shown in EU countries, so that they can only be shown for free. English clubs would earn less money then, so they could lure fewer players away from other countries. PSV would at least have some chance of beating Arsenal. Isn’t that how football should be?

Let me not talk too much about Dutch clubs losing too many matches and turn away from the inequalities in football. What are the other effects of a European pay-TV ban? Obviously, broadcasters would make less money. Therefore, they would pay the clubs less for their broadcasting rights. So the clubs would earn less and would have to moderate their expenditure. They could easily do this by paying the players less so that, on balance, they would not be disadvantaged. In the era before pay TV, clubs basically broke even, with lower income and lower expenditure and with George Best, Diego Maradona, Willem van Hanegem and Eusébio producing wonderful play. So a pay-TV ban is perfectly possible. Of course, it would have to be announced well in advance to give clubs time to adjust their spending patterns.

But how would TV stations finance their broadcasts then? That’s simple: they would use the revenue from commercials. This revenue would be more than sufficient for broadcasting the Premier League matches. History shows it is even sufficient for broadcasting the highlights of all games in the Dutch second division. So, we would be able to have a pay-TV ban for all important matches while being sure they will remain on the air. Additionally, this also means there would be no need for broadcasters to use taxpayers’ money, or the revenues of a compulsory licence fee for owners of a television set, to show football matches.

The pay-TV ban would have one drawback: players would earn less. At the same time, the benefits would be considerable. The first advantage concerns the fans who would watch the broadcasts anyway: they get them for free. Their savings would be more or less equal to what the players (and coaches) would lose through reduced salaries. If the savings for those fans were the only advantage of the ban, the question of whether we should have a ban would be a question of fairness – and nothing else.

But the ban also has another advantage. This concerns the fans who do not watch (certain) matches on pay TV because the subscription fee is simply too high for them. These fans will watch the broadcasts if they are free, because football gives them pleasure. For these fans, a pay-TV ban would mean more pleasure. At the same time, the broadcasters’ costs would not rise when more people turn on their television sets to watch football. So, without pay TV we get more pleasure without any extra costs. This means that economic welfare improves, or, put differently, the size of the (total) cake available for all Europeans increases.

So, the cake gets bigger and is shared more equally as well. Whether more equality is desirable is a question about which people can have different opinions. But, in any case, most people do think it is good to increase the size of the cake. And here the conclusion is clear: a European ban on pay TV for all important football broadcasts increases economic welfare. Indeed, the Dutch economist Loek Groot, in his 2008 book Economics, Uncertainty and European Football , says of this issue that “a more convincing case for government intervention is hardly conceivable.”

Some fans may still have their doubts. Hasn’t this argument been fabricated by some Dutch football fanatics who cannot accept the fact that Ajax have been humiliated by larger European clubs in recent years? Not at all. The essence of the argument goes back as far as 1958. At that time, it had become technically possible to limit the consumption of a particular broadcast to any specified group of individuals by use of so-called ‘descramblers’. But Paul Samuelson, who later became the first American to win the Nobel Prize in Economics, suggested this might not be sensible. Using the term ‘marginal costs’ – which means the costs of producing one additional unit of a good or service which can be consumed by one person or family – he wrote, “For what, after all, are the true marginal costs of having one extra family tune in on the program? They are literally zero. Why then prevent any family which would receive positive pleasure from tuning in on the program from doing so?”

Let me illustrate this argument with a hypothetical example. Suppose Chelsea v Manchester United is on Sky and 2 million people watch. If, however, the match had been broadcast free-to-view, 10 million people would have watched. So 8 million people do not watch because Sky is too expensive for them. Now, suppose that each of these 8 million people is asked the following question: what is the maximum amount you are willing to pay for watching the match (assuming a pay-per-view service is available)? Probably, some will answer that they do not wish to pay at all. Some others will be willing to pay one penny, or two pence, or three, and so on. There will also be fans who are willing to pay more than a pound and some may be ready to pay more than five. Now suppose that on average these 8 million people are willing to pay 50 pence each. This means the average person would have obtained an amount of pleasure worth 50 pence if he (or she) had watched the match. Therefore, the total pleasure lost because 8 million people do not watch in reality is worth £4million pounds. This is the loss in economic welfare caused by the fact that the match is on pay TV.

Of course, the figure of £4million is no more than a guess. Still, the order of magnitude may not be fully unrealistic. Of course, the next time Chelsea meet Man United, English fans can make their own estimates, which may well be better than mine.

In any case, the following holds: every time an important football match is shown on pay TV it causes a loss in economic welfare, which will be significant in many cases. Now, there are many football matches on pay TV, in many European countries. Therefore, the decrease in economic welfare in Europe caused by pay TV for football must be large; every single year, it may well amount to billions of pounds. So the size of the cake available for all Europeans is strongly reduced because so much football is on pay TV. This makes Samuelson’s old question all the more pressing in modern times. Why prevent any person who would receive positive pleasure from tuning in on a football match from doing so?

In 1964 another American, Jora Minasian, gave an answer to Samuelson’s question by noting that a number of interesting programs would not be on the air without subscription television because their costs could not be covered by the revenue from advertisements. (The Americans were discussing a television system with private broadcasters only; the US did not have a public broadcaster like the BBC.) Samuelson immediately agreed with Minasian (claiming his earlier article had already left open this possibility). Indeed, no economist can disagree.

But Minasian also emphasised that programs that attracted a (very) large number of viewers could be produced without subscription television; here, the revenue from advertising was sufficient to cover the costs so that subscription television was not needed. He estimated that many programmes needed about 20 million viewers at least to make subscription television unnecessary. For programmes that were less popular than that, subscription television could be useful. To give the full argument: subscription television was useful for programmes that were not among the most popular ones but that did have a high value for those who liked to watch.

In Minasian’s time, the costs of broadcasters were higher than at present while returns from advertising were lower. So present-day broadcasters need fewer viewers to cover their costs by means of ads. For instance, the highlights of the Dutch second division, which have been broadcast free-to-air by commercial stations for many years now, normally attract a few hundred thousand viewers at most. Many football broadcasts are more popular than that, which means the revenue from commercials will outweigh the costs.

Where is the boundary between broadcasts that can be financed through commercials and broadcasts that cannot? Should we let a committee of experts compose a list of football events that belong to the first category and should be free-to-view? No, that would be a waste of money. It’s more efficient to let the market do most of the work.

To make this happen, the government could rule that all broadcasting rights of football must be sold in a special type of auction in which, in the first stage, only free-to-view stations are allowed to make a bid. If a bid is made then, the seller is obliged to accept it while the bidder is obliged to broadcast the matches or highlights free-to-air. Good.

If no bid is forthcoming, the market has given a clear signal: it is not possible to finance the broadcasts through commercials. This means that pay TV channels should be allowed to make a bid, during a second stage of the auction. This may be necessary for, say, the matches from the English fourth flight and below.

I wish other persons no ill. I would not even wish the usually arrogant team of Ajax to be relegated, even though I am a Feyenoord fan. But as an economist I think we must be hard now and then in order to promote the common good. For instance, I think there are certain cases in which a government should reduce the number of civil servants, even if the people to be fired have invested a lot in their job – because this helps the economy as a whole and increases the size of the cake. In certain other cases, I am in favour of reducing the pensions of people who have been working hard for possibly 40 years or more – because it is necessary to spend more money on the education of young people among other things. And so, using the insights from Minasian, I also have to say now that the activities of Rupert Murdoch should be restricted to the lower divisions of football. It may be hard, but that’s where Sky Sports belongs.

Economists normally have little reason to complain about the attention they get; their arguments may even be given too much weight now and then. But in the debates about the UK’s list of ‘crown jewels’ that should be broadcast free-to-air, little attention has been paid to the concept of economic welfare. Of course, it has often been said that with pay TV fewer people watch and that this is a disadvantage. But the arguments have never been phrased in terms of economic welfare or the size of the cake as far as I know.

Take the panel of David Davies, which, in 2009, gave advice about the composition of the ‘crown jewels’ list. The panel advised that a few events should be added to the list and a few others should be delisted (after which the government did not change the list at all). The criterion on which the advice was based was formulated as follows: “In order to be eligible to be listed, an event must have a special national resonance and not simply a significance to those who ordinarily follow the sport concerned.” Given this criterion the panel did not consider listing matches in the Premier League; such matches were regarded as not having a national resonance.

For Europe a similar story can be told. In 1997, the EU asked its member states to draw up a list of events that should remain available on free-to-air TV because of their “major importance for society”. In response, several countries created such a list (at the time, England already had a list of crown jewels). When composing their national lists, member states translated the criterion of the EU (major importance for society) into criteria such as that the events serve to unite the nation, or are an expression of the country’s cultural or social identity. The Davies panel also took account of the EU criterion, arguing that its own criterion of national resonance was in line with it.

The criteria above reflect important concerns indeed. However, they tend to lead to relatively short lists, while sound economic analysis would lead to much longer ones – at least as far as football is concerned. Why use tax money to let panels of experts investigate whether or not the Champions League matches of the national clubs should be broadcast free-to-view because they help unite the nation, or have a national resonance, when it is certain anyway that showing them for free will increase the size of the cake (and let it be shared more equally)?

We often hear European politicians saying that hard measures are necessary for helping the economy as a whole, for increasing the size of the cake, for promoting the common good, or for whatever other term they like to use in this context. But why do they not think this way when it comes to pay TV? Are these politicians, or their advisors, not capable of understanding basic economic principles? Do they only want to be hard on ordinary people and not on media tycoons? Or are there other arguments against free-to-air TV?

There is one other counterargument and it has been considered by the Davies panel and many other observers: the money from pay TV can be used for social initiatives. In my view, this argument can be relevant for sports like cricket and rugby, where earnings are relatively low. Pay TV money may be a necessary condition for realising important grassroots programmes here. Of course, it always needs to be seen how things work in practice. But in theory at least we are dealing with a serious advantage of pay TV here, and it should be weighed against the disadvantages.

But the argument does not apply to football. The football sector is very rich. If we want money from the top leagues to be used for grassroots programs, there are other instruments to realise that goal. For instance, we could introduce a levy on the earnings of the wealthy clubs, the proceeds of which are used for grassroots projects.

Is this idea too far-fetched? No. It comes from a country no further away than the US. In 1997, the Americans introduced a ‘luxury tax’ for the richer clubs in baseball and such a tax also exists in basketball now. So it should also be possible to have some kind of tax or levy for the richer football clubs in Europe.

To give an example: the EU could force all football clubs which spend more than €20million a year on player salaries to spend 25% of the excess on grassroots projects. The football sector could easily cope with such a measure, even if it were combined with a pay-TV ban for all important broadcasts. The clubs would then still be able to produce high-quality play. Of course the clubs would have to pay the players less, the decrease being greatest for the richest clubs. But that would only mean that their squads become somewhat weaker, so that Arsenal v PSV would give the fans more excitement. At the same time, economic welfare would increase. So why not do it? There are no serious counterarguments left.

I do not want to raise false hopes. I know reality can be hard. But maybe, just maybe, it will turn out that if large flows of money stream from the world’s richest league to the many fields where English children play and practise, while all these kids are free to watch their heroes on TV, England will win the World Cup one day again. Isn’t this how the inventors of football would have liked it to be?

Available in both digital and hard-copy formats on a pay-what-you-like basis (digital copies are available for as little as 1p each), The Blizzard has fast established itself as must-read publication dealing with all manner of footballing topics from around the world. This article appeared in Issue Eighteen, which is available now. 

The FSF blog is the space to challenge perceived wisdom, entertain readers and inform our members. The views expressed are those of the author and they don’t necessarily represent FSF policy and (pay attention journalists) shouldn’t be attributed to the FSF. 

Tsjalle van der Burg teaches economics at the University of Twente, The Netherlands. He publishes on football (and other subjects) in newspapers and scientific journals. He is co-author of the scientific article “Progressive taxation as a means to improve competitive balance” which appeared in Scottish Journal of Political Economy. His recent book “Football Business” has been written for the general reader.