1. Background Information
In 1998, StarHub first introduced the English Premier League to Singapore and has constantly secured broadcasting rights for the past 12 years.
During that period, local telecommunications rival, SingTel, has launched their own pay-TV service named mio TV on July 2007, signaling its intention to rival StarHub to be the nation’s main pay-TV provider.
In 2008, SingTel made its first step by securing the media rights to the UEFA Champions League and UEFA Europa League from 2009 to 2012. With the rights for these prestigious European football competitions, many StarHub pay-TV customers were forced to sign up with SingTel’s mio TV to satisfy their needs.
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One year on, in October, SingTel rocked the nation by announcing their victory in the bidding war for the media rights for the English Premier League, which is known now as the Barclays Premier League, from 2011 to 2013. The victory was greeted with dismay from many football fans, as they now have to make the jump from StarHub’s pay-TV over to mio TV to get their dosage of English football. This effectively ended StarHub’s 12-year broadcasting rights of the league, which would certainly result in a fall of subscribers in time to come.
2. Purpose of the Report
This report aims to identify the various economic concepts shown in the textbook, and show how they are applicable in the actual business world using the decisions of StarHub and SingTel as examples.
3. The Art and Science of Economic Analysis
3.1 The Economic Problem
In the article, it is clearly identified that the resources which led to Starhub bringing in the Barclays Premier League (BPL) to Singapore are human capital and the entrepreneurial ability of the firm.
Human capital was shown in the form of knowledge they had on the wants of the locals, and the entrepreneurial ability of StarHub made them realize that they could profit from this project.
It was exactly the same two factors that led SingTel to wrestle for the BPL media rights from StarHub. Having observed the huge economic benefits StarHub enjoyed with the monopoly of the BPL media rights in Singapore, SingTel realized they too, would profit hugely from the ownership of the BPL media rights.
Thus, SingTel launched a bid to rival StarHub for the rights, which sparked off a bidding war between the two telecommunications firm. Eventually, SingTel earned the rights to broadcast the league’s game for the next 3 years, starting from 2010.
3.2 The Science of Economic Analysis
SingTel’s decision to foray into the Pay-TV market and especially, the market for televised sports like soccer is not due to a normative economic statement, or opinion, made by their staff. Instead, it has been based on a positive economic statement, which is backed by concrete facts.
The decision to outbid StarHub for the BPL media rights was greeted by the stock market with changes to the share prices of both firms. “StarHub’s price dived 16 cents to a low of $2.01 before closing at $2.03 yesterday. SingTel’s share price rose from $3.25 to $3.31 before closing at $3.28.” (A whole new ball game in pay-tv market, 2009, October)
This supports the statement that the local market for the BPL is lucrative, as the stock market has made changes to reflect the expected future gains of SingTel, and the foreseen loss of StarHub.
Having said so, the change in the share prices are definitely in response to SingTel’s successful bid, thus eliminating the possibility that the fallacy that association is causation was committed.
4. Economic Tools and Economic Systems
4.1 Three Economic Questions
Of course, before the bid was launched, SingTel had to know what to do should they win the bid. Hence, the three economic questions learned in Microeconomics come into play. Firstly, SingTel has identified the broadcasting of Barclays Premier League matches as a service they wish to provide to the nation.
Secondly, the launch of mio TV in 2007 paved the way for the bid, with SingTel in the clear that they would use the mio TV as a portal to broadcast programmes, especially the BPL games in the future.
With the above two questions answered, SingTel’s ultimate aim was to overtake StarHub as the nation’s leading pay-TV provider. Hence, their target market would be the existing subscribers to StarHub’s pay-TV, and more notably, the huge number of subscribers to the BPL games and other sports programmes.
4.2 Negative Spillover Costs
Negative spillover costs have been incurred with SingTel’s foray into the local pay-TV market. This is supported by the article which mentioned that “SingTel’s foray into pay TV – which split the football content which previously all resided with StarHub – actually fuelled soccer fans’ ire.
Thanks to competition between the duo, they said, football fans have to sign up for both StarHub and SingTel’s pay-TV services to enjoy all of the matches they had previously received when StarHub was the sole pay-TV player.” (A whole new ball game in pay-tv market, 2009, October)
With that, it is clear that the move by SingTel has not gone down well with sports subscribers of StarHub’s pay-TV and has created unnecessary inconvenience.
5. Economic Decision Makers
5.1 The Firm
The answers from the three economic questions, namely what service to produce, how and who to produce the service for, reiterates the fact that SingTel is a firm, just like StarHub.
Firms are economic units created by entrepreneurs looking to earn money through the combination of the various resources to produce a good or provide a form of service.
A more specific term to describe SingTel and StarHub are that they are separate corporations. Corporations are one of the most highly-valued forms of business, often equipped with significant financial power. Funds can be raised quickly through the sale of the corporation’s stocks, which also leads to the company having an array of stockholders.
Behind the strong financial wealth are several drawbacks. Firstly, stockholders are unable to have a significant say in the operations of the corporations with their votes making up only a minority. Instead, a board of directors is often entrusted with the job of making corporate decisions with their bigger shares. Corporate income is also taxed twice, resulting in more profits being used to pay taxes.
Despite that, corporate incomes are often huge sums of money, and the taxes would not be able to affect it much.
6. Demand, Supply and Markets
6.1 Demand, Supply and Market Equilibrium for SingTel’s mio TV
For SingTel’s mio TV, the demand and supply increases by the same value. The increase in demand is attributed to the successful bid of SingTel for the Barclays Premier League’s media rights. With the media rights, SingTel is able to broadcast the BPL games on their pay-TV service. This would cause a significant increase in the subscribers for mio TV as the subscribers want their dosage of BPL football. This is in line with the taste and preferences of the subscribers, which is a determinant of demand. Hence, there will be a rightward shift for demand.
The change in supply for SingTel’s mio TV is due to SingTel’s expectations on the future prices of their sports package, which is a determinant of supply. With the hype for the BPL matches present now, it would bring along sales for the sports package. However, in a year’s time, people might be more interested in other sporting events, and the BPL matches would not appeal as much to the public.
As a result, SingTel would then have to reduce their prices to increase sales as the sport package would turn into a luxury product, instead of a necessity. This would see a leftward shift for supply.
With an identical shift in the demand and supply curve, the equilibrium price will remain the same.
6.2 Demand, Supply and Market Equilibrium for StarHub’s pay-TV
For StarHub’s pay-TV, a fall in demand has been observed. This is a result of their failure to continue providing Singapore with the BPL matches on their pay-TV service. As such, consumers desperate for their fix of football decided to make the jump to SingTel’s mio TV due to their taste and preference for the BPL matches. This is the determinant of demand that causes the fall in demand.
There is no change reflected in the supply curve as the channels in the sports package are still present. However, the only difference is the removal of the BPL content. Hence, there is no change in supply.
As such, the equilibrium price has reduced to account for the fall in demand.
7. Elasticity of Demand and Supply
7.1 Price Elasticity
For many Singaporeans, the Barclays Premier League matches are not considered as a necessity to them. Hence, the demand of SingTel’s sports package is more price elastic to the general public. This means that they are very responsive to changes in the price plans for the matches, and would be unlikely to sign up for the package should it be too pricey.
However, to the football fans in the nation, it is a content they are not able to live without. Therefore, the demand of the package is less price elastic to them, suggesting they are not responsive to price changes. This indicates that they would be willing to sign up for the package, regardless of the change in price.
7.2 Income elasticity
With the nation recovering quickly from the economic recession, as seen from the recent reports stating that Singapore’s economy “expanded at a stunning pace of 19.3 per cent in the second quarter of 2010.” (Singapore economy zooms 19.3% in Q2, 2010, July), the money income of consumers has risen.
To them, SingTel’s sports package is a normal good, as compared to StarHub’s sports package, which has been deemed as an inferior good. This is highly due to SingTel’s success in securing the media rights for the BPL games, which allows them to broadcast the BPL games and other related programmes on mio TV.
Thus, with the increase in money income of consumers, they would be more willing to purchase the sports package launched by SingTel.
8. Production and Cost
8.1 Costs in the Long Run and Economies of Scale
Firstly, the successful bid for the BPL media rights and ESPN Star Sports brought an increase to the amount of channels available for mio TV. This would indicate an increase in the output by SingTel.
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Next, average cost for SingTel decreases as they would see an increase in subscribers, especially with football fans rushing to sign up for their sports package. This would cover up the cost incurred between q and qa.
Lastly, with the increase in customers for SingTel’s mio TV service, they would have to increase their plant size to cater to the increase in demand. The plant size could increase in the form of having more service centers around the island, with more technicians and customer service officers hired to meet demands. This would open up the opportunity to create a more extensive division of labour, reflected from qa to q’.
In the long run, SingTel’s decision to take over as the exclusive broadcaster of BPL content would enable them to earn a tidy sum of profit. SingTel was not afraid of suffering losses even though StarHub reported that they “lose money from providing sports content to pay-TV customers.” (A whole new ball game in pay-tv market, 2009, October)
They knew that as they were the only pay-TV operator showing BPL content, they would be able to benefit from the media rights with business opportunities coming in from all over the market, including advertising and partnership deals.
8.2 Explicit and Implicit Costs
In the case of SingTel, they have incurred both explicit and implicit costs in their decision to outbid StarHub for the BPL media rights. The explicit costs incurred are the money spent on bidding for the exclusive media rights for the Barclays Premier League and the cost of operating mio TV.
The implicit costs, also known as the opportunity cost incurred, would be the reduction of their budgets to spend on other genres of programmes. This reduces their ability to bid for other genres of programmes such as primetime blockbusters.
9. Oligopoly – Duopoly
9.1 Barriers to Entry
With only two pay-TV operators in Singapore, the oligopoly could be identified as a duopoly. A duopoly is a form of oligopoly where only two dominant players are present in a market.
As with all kinds of market structure, barriers to entry are in place to deter additional competition. Firstly, there is a high-start up cost involved to enter the pay-TV industry. With bids starting from six-figure sums, a lack of start-up funds would certainly spell the end of the new company as they would not be able to compete with the financial power of StarHub and SingTel.
Secondly, StarHub and SingTel have been around for some time, establishing a reputation along the way. The general public is more accustomed to these brands, and any new entrants to the pay-TV market would find it hard to persuade customers to switch to their service. This is true till they are able to force competition through providing exclusive content that the customers demand or other attractive deals.
In the case of SingTel’s mio TV, their original entry to the industry back in 2007 was tough as StarHub was the only established player in the market. SingTel’s mio TV was finally able to garner the support of customers when they secured the rights to the elite European football competitions.
Lastly, the new entrants would probably suffer losses early on, as a large output is required before low production costs can be achieved. This is also known as the economies of scale.
The economies of scale would not benefit the new entrants as it takes time to establish high economies of scale. This would put them at a disadvantage as they are unable to effectively compete with the other pay-TV providers.
9.2 Price Leadership
Price leadership refers to a player in the market that establishes a price for the rest of the industry to abide to. The player that sets the market price is usually one of the forerunners in the industry, and others in the market would follow suit. This is practiced to avoid price competition as everyone’s prices will be kept the same.
In the case of SingTel, after they have taken over the media rights for the BPL games from StarHub, pressure was inflicted by the public for prices to remain the same. Fans feared that a change in ownership of the rights would cause a hike in the price for BPL matches, due to the exorbitant bid made by SingTel for the rights.
Hence, SingTel agreed to maintain the same price that StarHub used to charge for their sports package, appeasing the public. Thus, price competition was not present in this scenario.
SingTel mio TV
$25 million9.3 Game Theory
SingTel’s huge bid for the Barclays Premier League media rights was not made without any form of theory. Instead, SingTel and StarHub’s bids for the BPL media rights could be represented by the game theory. In the game theory presented above, the figures used are generic as the actual bid was not disclosed to the public.
The objective of the game theory is to avoid the worst possible outcome, which in this scenario, is losing the bid for the rights. Hence, neither SingTel nor StarHub would think of maintaining their current bid. This is because if the other party decides to raise their bid, it would effectively rule them out of the competition.
Thus, neither side would maintain their bid, ruling out the option of both parties maintaining their bids. As such, the only likely choice would be for both telecommunications firm to raise their bid.
The difference was that SingTel decided to raise their bid significantly, which outweighed StarHub’s raised bid with ease. Hence, SingTel obtained the media rights for the Barclays Premier League.
In conclusion, SingTel has come a long way to achieve its goal of overtake StarHub as Singapore’s dominant pay-TV operator in sports. When SingTel first started, they experienced difficulties attracting customers as they were unable to rival what StarHub was able to offer to its subscribers.
It was only when they obtained the broadcasting rights for the UEFA Champions League and UEFA Europa League that football-mad customers decided to make the switch to SingTel’s mio TV. A year ago, SingTel stepped up its attempt to overtake StarHub by outbidding the latter for the BPL media rights for the next three years.
Their successful bid enabled them to be the new price leader in the industry, and many football fans from StarHub made the jump from StarHub’s pay-TV to SingTel’s mio TV to get their fix of football. This led to an increase in demand of SingTel’s mio TV, and a fall in demand for StarHub’s pay-TV.
Looking at the long term benefits, SingTel’s costs have been reduced due to an increase in the economies of scale, through establishing more service centers and hiring more workers to meet the increased demand.
With a huge number of customers making the switch from StarHub pay-tv to SingTel mio TV due to their need for football, it has allowed SingTel to overtake StarHub as the nation’s dominant pay-TV operator in sports.