Originally Posted by derek500:
“BIB 2 It's an auction!! Bidders are desperate to get the rights, which pushes the prices up. Competition for sports rights is bad for the consumer.”
There is a widely held view on here that if sports rights cost more, the price to the consumer will rise.
I don't entirely agree, because:
The broadcaster will set its prices to maximise its profits. Once the auction is over, the price the broadcaster is paying for the rights is a sunk cost - it is fixed and cannot be changed.
So whatever that sunk cost is, the broadcaster is still faced with maximising profits - ie maximising [Revenue minus variable cost].
The sports rights cost is not a variable cost - it is now fixed.
Sky is paying 40% more for PL rights next season. Yet it is increasing the cost of Sky Sports from £21 to £22 - ie by 5%.
The 5% price rise for SS bears no relation at all to the 40% increase in the rights cost.
Why does Sky raise the SS price by 5%? Because that is what they think is the optimum to maximise profits - ie to maximise [Revenue minus variable cost] given that the PL rights cost is now fixed and cannot be changed whatever Sky does.
The fact that the PL rights cost has risen 40% is now irrelevant to the pricing decision.
If that's all a bit theoretical, consider another practical example:
In 2004/07, the amount Sky paid for PL rights fell significantly compared to 2001/04. Did Sky cut the price of Sky Sports?
No. Because there was no reason to. The fall in the rights cost just fed through into higher profits (or was used for investment elsewhere).
The pricing decision was unaffected. The demand curve hadn't moved. The optimum price to maximise [Revenue minus variable cost] was not affected in any way.