Legal issues in the international distribution of sports media rights

Wednesday, 16 October 2013

Early this year the Premier League has announced numerous international deals for its media rights for three league seasons commencing with the 2013-2014 season.

The deals it has completed range from territories with an existing sophisticated media rights environment such – as the USA where the rights have been given to one broadcasting group, NBC, which has 95% coverage in the country and operates both pay and free TV channels – to less developed territories – such as Mongolia where the rights have been granted to an agency, IMG, to further license them – to deals covering entire regions – such as its agreement with the pay TV operators DirecTV PanAmericana and Sky Mexico for Central and South America (excluding Brazil). This article analyses some aspects of the sale of media rights into different types of territories.

Market considerations

One of the key differences between such territories is how developed the respective markets are. The media industry in countries like the USA tends to be very sophisticated; typically pay TV has a high market penetration, on-demand content will be widely available, Internet use is widespread and bandwidths are usually high enough to facilitate consistent access to content without interruption, and the delivery of audiovisual content on mobile devices is well developed. Territories like Mongolia, on the other hand, will have media industries that are far less sophisticated. Pay TV has low market penetration as most will not be able to afford it, there is likely to be little content available on-demand, the internet may not be widely available, bandwidths are likely to be low (for example in 2010 only 2.6% of the population of Mongolia had broadband subscriptions) and the mobile industry is less likely to have capacity to deliver quality audiovisual content. Few, if any, territories in Central and South America will be as mature as the USA and some may in fact be closer to Mongolia.

The differences between the territories will impact on the contractual terms agreed by the rights holders with the licensees, for example:

Do they need to permit, or even impose, sub-licensing in order to achieve better coverage?
Can they achieve coverage throughout the territory with one deal or must they divide the rights up in the territory?
Is the best way to maximize revenues to do one or multiple deals?
To enable the broadcaster to pay a higher rights fee, is it going to be necessary to permit it to sub-license some of its rights in order to recoup some of its investment?

Sub-Licensing

If the rights holder permits the broadcaster to sub-license it should insert in its agreement with the broadcaster controls over the process to ensure:

that the sub-licensee is bound by all applicable obligations it has imposed on the broadcaster and that the broadcaster is liable to it for the sub-licensee's actions. It may even require its own template is used for the sub-licence in which case it must specify that use of the template does not limit or waive the broadcaster's responsibility and liability for the sub-licensee and its actions.
the right to pre-approve the sub-licensee so that it can satisfy itself that the sub-licensee is a party capable of exploiting the rights effectively and of complying with its obligations and also to ensure that the sub-licensee is not an entity which damages the competition's reputation, for example a pornography channel.
the right to deal directly with the sub-licensee in case a situation arises where communicating through the head licensee takes too long and causes damage to the rights holder, for example if the sub-licensee omits to geo-block its internet transmissions.
the right to enforce the sub-licence contract directly and even a direct right of termination in the sub-licence contract.

As for the broadcaster itself, it must ensure that any obligations it has taken on from the rights holder are passed on in the sub-licence contract to prevent it being in a situation where it is in breach of its contract with the rights holder because it can neither comply with an obligation, because the corresponding rights have been sub-licensed, nor force the sub-licensee to comply with it or seek damages from the sub-licensee because the obligation has not been passed onto the sub-licensee. In any case, where the rights holder has a contractual right of approval, for example approvals over the manner in which competition logos are used, the broadcaster may wish, in the sub-licence contract, to not only reserve a corresponding approval right for itself but also insert an acknowledgement from the sub-licensee that the broadcaster's approval depends on it first obtaining rights holder approval and that it has no control over the rights holder's decision. Consequently any assessment of the reasonableness of the broadcaster's decision must take that into account.

Dividing rights

If a rights holder chooses to divide its rights up in a territory, it is imperative that there is no conflict between broadcasters. One way of doing this is to grant non-exclusive rights, although this may not be desirable since broadcasters are likely to pay a lot more for exclusive rights.

Another way is to divide the rights according to modes of delivery. This may be relevant in a territory where, for example, the TV broadcasters have no internet or mobile presence. This option can cause difficulties due to the convergence of technologies, for example is accessing an internet broadcast on a smartphone an internet right or a mobile right? Is accessing a cable TV service over IPTV a TV right or an internet right? Drafting to avoid such conflicts is becoming increasingly difficult with the result that many rights holders sell their rights on a 'platform neutral' basis and choose to instead divide rights according to different content packages (this is what the Premier League does in the UK). Although, if there is a desire to secure coverage television throughout the territory, this may not achieve that if no broadcaster has high coverage. It may be possible to achieve a balance between securing high rights fees and good coverage by granting rights to both pay and free TV. It could even be that some content is available on both and some exclusively on pay TV, such as Formula One's UK deals with both Sky and BBC.

USA

Going back to the three categories of territories identified above, for the USA the Premier League has been able to do one deal with a broadcasting group that gives its product significant market coverage throughout the territory in both English and Spanish. With this deal the Premier League has been able to increase its revenues from the USA significantly compared to the previous agreement ($249m). NBC views the Premier League as a product whose popularity will grow in the territory and therefore it seems, at this stage, to have acquired the league to exploit itself in order to increase viewing figures rather than as something it will sub-license parts of in order to recoup its investment.

Central and South America

When doing one deal across an entire region, like Central and South America it is possible that no one broadcaster has significant coverage in all the territories; the Premier League has sold to two broadcasters in order to cover the region, with DirecTV operating mainly in South America and Sky Mexico operating in Central America and the Dominican Republic (it should be noted that both broadcasters have some common ownership).

It seems that a single three-party contract has been signed with the two broadcasters. In such a contract the rights holder may wish to build into the contract flexibility for itself in a situation where one of the broadcasters is in breach. Ideally it would want to reserve the right to take action against either just that one broadcaster or both, and ultimately have the freedom to either partially terminate the contract with the party in breach or terminate it completely. If it terminates against one broadcaster it may also want to have the option of either forcing the remaining broadcaster to broadcast the competition in the territories in which the other broadcaster previously broadcast it or to take those territories back completely and re-sell the corresponding rights.

An alternative to a single (or dual) broadcaster deal for a region would be for a rights holder to sell to a regional broadcasting union, for example Organización de Televisión Iberoamericanas (OTI) in Central and South America, which would buy on behalf of its members which are broadcasters in the relevant territories.

Pan-regional broadcasters like DirecTV and Sky Mexico may not have extensive coverage in every territory in the region so it may be desirable to allow them to sub-license in certain territories to gain greater coverage there. In fact, particularly considering that DirecTV and Sky Mexico are both pay TV broadcasters, if one of the Premier League's objectives is to grow the appeal of the league in Central and South America (something that is examined further below), it could even try to impose obligations on the broadcasters to sub-license a minimum number of matches to free TV operators in their territories.

From a financial perspective, the deal is a sizeable one for the Premier League ($100m)¹. It could be that pan-regional broadcasters like DirecTV and Sky Mexico pay more than they would like for some 'secondary' territories in their region in order to secure the rights to other key territories. If so they may well need to sub-license in those secondary territories in order to help finance their overall acquisition.

Mongolia

The fact that the Premier League sold the rights in Mongolia to an agency reflects the nature of the territory as one where the media landscape is under-developed. It is likely that any bids received by the Premier League from broadcasters for this territory were of low value. There is the possibility however that the market will mature during the next three seasons, with existing broadcasters becoming more established, new broadcasters entering the market and technologies becoming more up-to-date better enabling the exploitation of internet and mobile rights. However, a rights holder like the Premier League may not necessarily have the time or resources (or possibly the inclination) to focus on a territory like Mongolia sufficiently to take advantage of this. Furthermore, when a broadcaster is appointed it may well be exploiting the rights for the first time and be fairly inexperienced in dealing with premium rights so it may need a lot of guidance on the following for example:

how to exploit its rights;
how to comply with its contractual obligations, for example how it may and may not use any competition trademarks;
its implementation of encryption and geo-blocking technologies;
its compliance with any minimum broadcast standards; and/or
the interpretation of its contract.

This guidance can take the form of manuals, an intranet, workshops and even dedicated staff to liaise with the broadcaster. The rights holder may consider the time required to deal with this to be disproportionate to the amount of the rights fee.

There are many potential benefits for the Premier League to sell the rights to an experienced third party agency, like IMG. The agency can take the time necessary to gauge the media landscape, maybe even sell the rights on a season-to-season basis if this is likely to maximize revenues from the territory by best taking advantage of a constantly maturing media landscape. It may decide to split media so that mobile rights are sold to a mobile company, for example, if no broadcaster has the capability to exploit mobile rights. The agency can also devote the time and resources necessary to help guide licensees and ensure that they comply with their obligations in the agreement.

Agency Agreements

When appointing an agency, the rights holder can either grant the rights outright to the agency (a buy-out), in which case it must then sub-license to broadcasters, or the agency could be a sales representative finding and negotiating deals which the rights holder then signs directly with the broadcaster, in return for a percentage commission from all revenues earned by the rights holder in the territory. With both options there are two important considerations for the rights holder:

To secure a guaranteed minimum income from the territory. If the agency commits to this then it is the agency that takes the risk that its sales might fall short of the minimum guarantee which would result in it making a loss.
To share in the agency's success if its sales exceed initial expectations.

Ideally the rights holder would secure both of these so that it has a guarantee for a minimum income from the territory and, if the sales secured by the agency exceed a certain threshold, the rights holder receives a share of all income above that threshold.

Production Quality

The nature of the production is something that is likely to differ between the different types of territories. To ensure there is a certain level of production quality a rights holder may specify in the contract what support programming should be produced and broadcast, for example pre-competition build-up programmes, pre- and post-match review shows and highlights round-up programmes. It could require the match programme to be broadcast from the stadium. However, while in theory, specifying production standards in this way is in both parties' interests, the broadcaster may not be willing to commit to anything concrete in the agreement in which case the rights holder may instead try to secure a commitment to a level of production which meets more general quality standards, for example a standard commensurate with the standing of the Premier League as a global top tier annual sporting competition.

If NBC is to put its own stamp on the production, it would require the 'clean feed' to be delivered to it without the logo and advertising windows of the host broadcaster, for example Sky, which may be in the feed if the host broadcaster is the party producing the signal.

In territories like Mongolia, the resources are not likely to be there to have a studio production, create graphics or even produce their own commentary. It may be the case that the Mongolian broadcaster simply uses the 'dirty feed' of the host broadcaster including even the host broadcaster's commentary in English and possibly even their studio programming. Some rights holders, particularly for international tournaments, make available a guide commentary which is a basic level of commentary utilizing only one commentator describing the match with no additional comments and which is only available in one language, often English. If the Mongolian broadcaster wants to take the host broadcaster's commentary or a guide commentary (if one is available), the rights holder would need to grant the broadcaster English language rights which may not automatically be granted since it is common practice to only grant rights in those languages which are the official languages of the territory plus any others which are widely spoken. The benefit of only granting rights in certain languages is that the rights holder may then grant rights in other languages to other interested parties, for example international channels may wish to acquire multi-territory rights in the language of their home country. Another benefit is that if there is unauthorized overspill of transmissions into other territories which have different home languages, it could be argued that there is less damage done due to the language difference.

If the broadcaster wishes to use the host broadcaster's commentary, it may need to enter into a separate contract with the host broadcaster for the right to use it if the rights holder has not already secured the rights to the commentary in its contract with the host broadcaster.

Competition from the local markets

One aim of any rights holder will be to increase interest in its product abroad. This should give it a stronger position when it next comes to sell its rights and so hopefully increase revenues further – usually the primary aim of rights holders, particularly when selling their media rights abroad. The manner in which a rights holder goes about using its media rights relationships to increase interest in its product will vary depending on the type of territory.

For the Premier League, in a territory like the USA, it is fighting against the local sports, which are hugely popular, in addition to the MLS and Central and South American football leagues. Considering the size of NBC's investment in acquiring the rights, the likelihood is that the broadcaster will also want to work to maximize the popularity of the league however they may be unwilling to commit to anything in writing. The rights holder would want a commitment to a certain minimum expenditure on promotion of the league and of their match broadcasts.

Central and South America is slightly different because football is one of the biggest, if not the biggest, sports in the region although the local leagues are likely to be the most popular. When granting rights solely to pay TV operators like DirecTV and Sky Mexico, a rights holder could try to secure the broadcast of promotional spots for the broadcasts on free TV (preferably during prime time viewing slots) and on other media such as billboards and newspaper advertisements so that the widest possible audience knows of the broadcasts. This will incur an expense for the pay TV operators and so they may resist such an obligation. As mentioned previously, the rights holder could try to impose sub-licensing of a certain number of matches on free TV channels. This may not be completely unacceptable to the broadcaster if it means that it refinances some of its investment.

Territories like Mongolia are different still as the local league and local sports in general may not be well developed there so there could be an opportunity for the Premier League to establish itself as the most popular sporting competition in the territory, thereby setting the foundation for large percentage increases in rights revenues in the future. This has happened in some Asian territories such as Singapore. The broadcaster may not have the funds to invest in a high quality production or external advertising to promote its broadcasts. Instead the rights holder could require a minimum number of promotional spots to be broadcast on the broadcaster's own network during prime time viewing slots. The rights holder could even insist that matches be broadcast on a delayed basis during prime time viewing slots, perhaps in addition to the live broadcast.

Conclusion

When selling media rights for a sporting property across the globe, the maturity of the media landscape, the relative wealth of each territory and the nature of the existing sports markets are some of the factors that mean different types of territories require different approaches from the rights holder. These factors need to be carefully reflected when drafting the agreements between the rights holder and its licensees. If the rights holder adapts its approach carefully, it should be able to boost the popularity of its property and maximize revenues.

^{1 The combined deal is reported to be worth $100M.}