Following a rather odd conversation on The Formula 1 Blog with Anonymous, it is becoming increasingly clear that a breakdown of what it would take for Sky to break even is necessary. This is, after all, the main reason why the attempt to transfer the UK rights from free-to-air to pay-TV is likely to have medium-term consequences on non-UK F1 fans. It's a bit rough-and-ready because of the timing, but I will happily tidy up anything that you think needs tidying later.

Wimbledon never fails to get full crowds even though few people in Britain follow tennis otherwise. Silverstone never failed to get full crowds even in years where British F1 figures fell like a stone due to Schumacher dominating. You'd be surprised at how low an audience conversion is needed to fill a stadium, so saying that test cricket grounds are still full doesn't say anything about what's going on with the TV side of things. Attending a cricket match is a special occasion. It does not mean that watching cricket is still bread-and-butter to people. The BARB statistics do not lie and they say that Sky struggles to get a seventh of the audience Radio 4 Longwave does for cricket matches, and that both combined are far lower than cricket got before Sky took over. The numbers end up working for the sport largely because Sky can afford more, but that is reliant on capping the level sports can charge it. That works financially for sports that seriously undervalued themselves (primarily by only considering the BBC pre-Sky, which of course can't run adverts to offset its expenses) but F1 hasn't done that since 1981...

I suppose if one calls 234,000 rugby viewers (2008 League World Cup) with Sky compared to over 2.6 million for the previous version* pre-Sky a success, then rugby might be considered a success. From Sky's perspective, it's a relatively successful sport because the low sanctioning fees means it can make quite a bit from the deal; from the perspective of a rational outsider surveying the effects on the sport's support base, it is a disaster.

The more one looks at the effects of Sky getting involved in sport, the worse it looks for sport. If a sport wants to go from being a majority sport to a minor one, going the pay route's a pretty effective way of doing it. That's been demonstrated time and again.


Advertising is of course part of Sky's arsenal when paying for things. However, Bernie fees are not the only costs it faces, and F1 isn't football. It costs £10 m per year to produce F1 the BBC 2011 way and to do all the extra features Sky has said it'll do, it will need to spend even more than that. ITV couldn't get that much from sponsorship when it had F1 in boom time, so given that Sky isn't having in-race advertising and is operating in a recession, it'll struggle to even meet its production costs through advertising, let alone start tackling marketing, satellite rearrangement fees (yes, making a new channel costs money) and the Bernie fee (which is now four times higher for Sky than the BBC's production fee was). 

Even so, my original calculation of a million new customers being needed assumed, optimistically, that the non-Bernie fees would be entirely covered by advertising. (Before the amount Sky paid was announced, I tended to say "between 0.5 and 0.88 million" when commenting on the internet; I was bargaining on Sky doing some sort of cost calculation prior to purchase). The £40 m from subscriptions prior to F1's arrival has to be ignored on the grounds that they'll have bought other contracts with them. These naturally must be maintained, with the possible exception of programs that directly clash with F1 programming. Other sports may not be as expensive as F1 but they do have acquisition and production fees. Instead, the calculation has to be done from base.

There are two ways of getting Sky F1 - one using the HD pack and the other using Sky Sports. The Entertainment pack cost (common to both routes) has to be ignored because the channels on the pack are funded by it, along with all their programming. Much like the BBC, each Sky channel is funded separately. Terra Nova, for example, is not a free show. Even through the HD route, the HD money is not free because all the programming on Sky has to be converted to HD. If Entertainment and Sports are priced in relation to their values to Sky, then only half the HD top-up can be assumed to be available for F1.

Let's assume that the only sport that the people are interested in is F1 and that HD buyers don't buy any other packages (if we don't, again, the figures look even worse for Sky, as that person's subscription fee would then need to be shared among however many additional contracts corresponded to that individual's customised viewing habits). The cost of Sky Sports 1 and 2 on top of that package is £20 and this is the maximum amount Sky can take in per customer per month with regard to F1. HD, once the half for Entertainment package upgrading is removed, only contributes £6.125 per customer. Only new-to-Sky customers can be assumed to be taking the package for the full 12 months, so only the 7 months where Sky has an exclusive race can be safely counted for Sky's revenue (let's assume for now that Bahrain goes ahead).

I am also going to assume that everyone who watches F1 is a singleton who never has the TV on when entertaining and doesn't have lodgers or other unrelated co-residents similar sneakily "borrowing" a chair during races. Otherwise, each viewer is only contributing part of the subscription payment. I'm also assuming none of these people are bar, pub or club owners because then every patron of the bar/pub/club is contributing towards the subscription.

Remember that the Bernie escalator ensures that prices go up at least 10% every year (that fee quoted for Sky's acquisition will be the first-year price; Bernie rules ensure it goes up and up after that). The £40 m initial annual price becomes £77.95 m by the end of the contract Sky has. If that sounds high, the fee the BBC paid went from £25 m to £40 m a year from one end of its contract to the other (projected but never reached due to renegotiation) end; if it hadn't it probably wouldn't have needed to let F1 go. That's compounding for you.

At the moment, 30% of Sky customers are on HD (therefore using the cheap route) and 70% on SD (therefore would need the expensive route). Being optimistic and assuming this proportion does not move any further towards HD despite more HD subscribers being in Sky's overall business plan, Sky needs 0.95 million new subscribers (rounds up to 1 million to the nearest 100,000 subscribers) that didn't care for any Sky-carried sport bar F1. To break even. Compounding means it doesn't have to get them all immediately - a 2012 figure of 0.53 million is enough for that specific year - but Sky's sales definitely aren't going up by the 10% per year needed simply to keep up with Bernie (they only increased by 3% per year for the last 2 years - it's pretty consistent at the moment). 

Even 0.53 million is over twice as many viewers than Sky gets for any part of its non-football programming. It is unlikely Sky will get the figures it needs because past and present data demonstrates it. This is before considering that every assumption I've just detailed here - advertising revenue, house occupancy, HD, caring about other Sky sports, Bahrain, the extent of Bernie escalator - is more likely to go against Sky than in its favour with regard to making F1 pay, and therefore require even more people to sign.

(For the curious, on the assumptions made in this item, it would take 2.08 m cumulative new customers for Sky to be able to justify taking all 20 races in the first year of the next broadcasting contract of 2018, assuming the minimum number of new customers were signed up as needed to let it break even in each previous year, that no additional fee was made for exclusivity and assuming Sky merely wished to break even with F1 due to its high profile).

Japan F1 is mostly free Fuji TV. There is a pay option (Next) but it gets 1/6 of the audience the free version does (helped by the fact the same provider on the same platform shows the free and pay options - not the case in the UK). Brazil is primarily covered by GloboTV, which is free-to-air and easily beats the pay option for popularity. Italy and Germany used to have pay TV options (through Sky) but they've folded due to lack of interest. Some other countries with smaller audiences have pay-only, and their audiences went through the floor. This has left some channels dropping F1 altogether and others putting it on progressively higher-cost options. That's what always happens with pay TV concerning sports that were previously shown just fine on free-to-air**. The audiences shrink and so the pay TV provider has to rely on cheap rates to keep the option alive. Here's a hint: Bernie will never, ever, provide cheap rates.

So why are the likes of rugby and cricket succeeding despite their TV mistakes? Because other avenues of revenue exploded in the last decade or two. Sponsorship, once quite rare for a series, has become huge money, especially for drinks companies who would struggle to advertise in certain international markets through the standard methods. Ticket prices skyrocketed, turning the weekly patronage of a favourite sport to an occasional treat for the poor without turning away the rich (in fact, with more focus on rich clients as seen in the past decade, the rich are pouring in as they spy networking and hob-nobbing opportunities). The sponsorship alone accounts for why there's more money in disability swimming than ever despite it having no media profile worthy of the name and free tickets to nearly all events. The latter is why the Paddock Club in F1 is worth over 10% of the total income of F1 despite serving a maximum of 5000 people per race.

After all is calculated, Sky's chances of making F1 break even are remote. The chances of Sky keeping a sport that doesn't break even is even remoter. The chances of Bernie finding anyone willing to pay more than Sky pay him now in those circumstances is nil. That means Britain's fees will drop. It's not clear who'd pick up the rights then - it depends who has most to spare at that moment out of the not-recently-"burned" parties. What is clear is that it would cause a domino effect. Other countries would see that pay TV does not work and be able to call Bernie's bluff by not engaging in bidding wars with such channels. It would mean the prices paid by channels would fall through the floor. So would F1's revenues.

F1 would have to either seriously tighten its belt (and hope it's no longer up to the neck in debt) or die.

Quite how not want F1 to kill itself counts as "not loving F1", as Anonymous alleged, remains a mystery.  

* - In case you're wondering, rugby union suffered even worse. The Heineken Cup final, for example went from 9 million in 2005 to below 185,000 in 2007. The only reason it's still on Sky is because the Heineken Cup charges much, much less for its tournament broadcast rights than Bernie does and the BBC is currently trying to sell sports rights rather than buy them.

** - Football, in case you're wondering, was not shown fine free-to-air before Sky got the rights; the BBC could typically only show one match a day - and hardly ever in primetime - due to broadcasting balance requirements, whereas Sky was able to show multiple ones, at any time of day, almost immediately. Being able to see twice as many matches means twice as many people are going to be interested, so it matters less if no single match gets much in the way of viewing figures compared to free-to-air - the sheer number of matches viewable through the multi-channel, more specialised pay TV system meant that many small parts became a bigger sum than the BBC could achieve. Also, people can't advertise on the BBC, so when Britain's favourite sport went to the advertisable platform, advertisers naturally paid top dollar to be associated with the sport. Football is, economically speaking, pay TV's one big sporting success.

Mon Feb 25, 2008 11:11 am

Warning! Long entry alert!

This blog entry started as a comment in Sidepodcast's discussion about trustworthy websites. During the discussion, there had been a fair bit of stick thrown at GMM (Global Motorsport Media) for stories being sent through their network without proper checking. What nobody had expected was for GMM itself to reply - at length.

I started typing a response, then came to the conclusion that nobody was going to stand reading the length of that reply in someone else's blog. It is worth saying that I'm only replying to the part of GMM's comment that requires a long response - quite a bit of it made perfect sense and merits little more than an "I agree". (If a GMM representative goes so far as to read this blog entry, then I thank them for their effort in doing so :) ).

The Whipped Cream Model of The Effects of Information Accuracy Expectation

Part of the GMM representative's comment queried how GMM could get so much flak when it was ultimately one of their sources that made the error. It is an interesting question. There definitely is a tendency to send blame for errors throughout the part of the system preceding the one which caught the error. This is because information is not like a water main system, where fixing the leak makes the system run correctly again (usually). Information typically goes through several minds before reaching the end of its influence, which means there are many checking points. It is part of human nature to check information. Therefore, the expectation is that information spread is as accurate as the provider of that information knows it can be. That is why information reliability has a reflection on everyone who carries that item of information.

The quality of an information provider is affected (among other things, most of which are not even touched upon by this discussion) by how closely the items of information provided link to reality. Accurate information increases the quality and the reverse is true. In fact, given how the human mind works, negative experiences stand out more than positive ones (and, in general, have more influence). One erroneous item of information, if in the wrong place, can throw askew a lifetime of understanding.

One could call it the "whipped cream" principle - in the same way as whipped cream transported from a cartridge to a bowl of pudding leaves cream stuck to the edges of dispenser and pudding as well as the cartridge, so the effects of information stick to the conduits and recipients of that information as well as the source. If the cream is in-date, then nice cream will stick to everything. If the cream has gone off before it's piped through, then everything will stink and, unless washed down properly, all the cream that comes out will taste funny even if the source was subsequently good.

This is why scientific journals have a process of peer review and reputable news journalists have checking systems. I have no idea what checking systems the German Focus magazine might have, because the only Focus magazine I'd heard of before yesterday was the UK science title. Focus should have checked the information before publication, but by the same token everyone down the chain should have checked the information as best as they were able as well.

As to why the messenger is getting shot, that is because blame is considered to attach to every part of the system that delivered the false information (the reverse is also true). So when the vote story was found to be inaccurate, Focus got some of the blame, GMM got some of the blame, the sites that spread the story thereafter got some of the blame and (in some cases) the individuals who went on to tell their friends about it got some of the blame.

However, previous track records are taken into account when the total effect of an information error is calculated:

- Focus is not the source of many stories we know about. While the readers of the vote story probably wouldn't trust it again, they are also unlikely to be in a position where that is an issue.

- GMM has had quite a few erroneous or misleading stories in the past. The effect of the vote story was quite small in terms of perception, it just so happens that it was the story that caused things like this discussion to take place (owing to a number of things over which GMM has limited/no control, such as the lack of substantial news that interested Sidepodders at that moment, the discussion of media quality issues in previous weeks prompted by the crossing of cut-off points (discussed in the "Information Accuracy, Freedom and Authority" section) and the tendency of Sidepodders to make lists - "Websites You Can Trust" being a very easy activity to turn into a list).

- The sites spreading the story often do what Keith does and moderate their feed. This reduces their informational error rate. While the individual erroneous story will have had more impact on them than GMM (and the more accurate the site usually is, the bigger the impact), the higher starting point of trust means that the net trust level is still higher than GMM's.

- The effect on individuals is varied and difficult for me to comment on personally, since I only told other people about it after the story was revealed to be false. Everything from zero effect to a complete loss of trust is possible, depending on the history of the relationship, the track record of the individual information provider and the receptivity of the recipient.

Granted, not everyone has the phone number to the right person in Mercedes to establish whether a vote on the F1 programme happened or not. I suspect that the nature of GMM may preclude it from having the right contacts to absolutely prove or disprove every story that crosses its desk (sometimes even the specialist press struggle). But a web monitor role implies that there is a certain amount of checking for accuracy.

Asking the source of each news item "What is the background for this item?" where it is not immediately obvious would be a good way of reducing the error rate while remaining within the powers GMM has. I suspect the answer received for the vote story would probably have allowed GMM to stop the story in its tracks, and maybe even issue a cautious denial itself. In the latter case, it would even have a (valid) scoop, which would increase the quality of the information conduit. In turn, this would increase the trust people had in GMM and increase GMM's ability to monetise that trust (which ultimately helps keep GMM going and growing).

Information Accuracy, Freedom and Authority

Next, the GMM representative wondered how the denial of the story invalidated the GMM story.

The explanation of this is summarised in yesterday's blog entry. What happened was that James Allen, a journalist most noted for his ITV commentary but who also writes books, mentioned in his blog that he had phoned Mercedes and they had denied the story. The key here is "he had phoned Mercedes". This immediately gave his take on the matter a more solid basis than the previous existing information, including that from GMM. Also, whatever gripes people may have had over James' commentary, he was not known for giving inaccurate information out (and when he did he usually got corrected before any damage got done, usually because the error had been committed in the high-pressure arena of the commentary box - one of several reasons why many high-speed sport broadcasters have two commentators). Taken together, this meant the information was most likely reliable.  This is known as information authority.

Information with authority tends to be believed over information lacking in authority. In an environment where pre-censoring is not practised (as in a place with a free press), this becomes important. The more censoring of information is delegated to individual intelligences, the more important information authority is. Note that information authority does not come from it having been approved by some (psuedo)political institution (otherwise we'd take everything the FIA said at face value), but through the likelihood of the story's proximity to the truth, the clarity and detail of the information, the track record of the information provider and how well the information fits in with other items of information the recipient possesses (or believes he/she possesses).

A free media tries to meet whatever is considered the most important value in the society in which it is placed. In the capitalist West, this often means being as profitable as possible. However, whatever other value(s) the press may chase have to be balanced by at least a modicum of what the people want, otherwise who will read their material? It so happens that when it comes to information, what most people want is authority. Many are satisfied by a low level of authority, but many others want the highest level of authority possible. Yes, it is possible for a news source to be wrong with authority, but if it is frequently wrong it will not retain its authority for long. The less authority an information source has, the less likely it is to be believed. "The Boy Who Cried Wolf" demonstrates this principle simply but brilliantly.

As for the analogy entailing our reaction to getting fifteen good strawberries and one bad one, there will be a variety of behaviours in that situation. Again, these vary according to the expectations of the buyer, the quality of the previous strawberries from that vendor and the quality of strawberries from other vendors. If fifteen out of sixteen is relatively good in the strawberry market, then people will be happy to continue with the vendor and will easily forgive the bad one. If other vendors routinely get sixteen good strawberries out of sixteen (and, to improve the analogy, charge more - with the strawberries, the price is currency, the other outlets' price is time waiting for the items), then responses get more mixed. Some will want the cheap strawberries regardless of quality, some want the consistently reliable strawberries regardless of the cost. The majority will consider both types. The more frequently bad strawberries appear, the more likely the high-quality ones will be chosen instead of the cheap ones, but everyone has different cut-off points. The vote story may well have crossed a few key people's cut-off points.

Speculation

The GMM representative made an interesting point about speculative stories. He/she says that 6 out of 10 "highly speculative" stories are completely false, 3 out of ten are partially true and 1 out of 10 is completely true. GMM's position is pro-speculation. A lot of the response is anti-speculation. I would be somewhere in between.

I don't mind speculation if it is clearly marked as such. If someone providing information has reason to doubt its accuracy, then that tag helps put the information in its proper context. This is especially true if a) the provider has specific grounds for that doubt and b) those grounds are provided along with the information. While it would be awkward for GMM to say it doubts an item because its source has previously provided dodgy information (for one thing, the source might refuse to provide further information to it!), other causes of doubt could be provided.

This is especially important given the failure rate of speculative stories. If we take the "6 out of 10" figure as true (while I have no proof, it's the most accurate working figure I've seen and the GMM representative is more likely to know the figure than I am), then that means the majority of such stories are false. That is a serious failure rate for information of this type, even if speculative stories form a small proportion of the total output. If an investment had a 6 out of 10 chance of losing money, the government would demand some sort of warning. While it would be wrong for a free press to have such a thing imposed on it from the government, the general public would benefit from wanting/expecting/requesting it of their information sources. GMM should be capable of it - the statistic provided by the GMM representatives proves that it is capable of recognising a speculative story, at least to an extent where it is confident of knowing the boundaries for the purposes of providing that statistic. If degrees of uncertainty can be indicated, so much the better, but one can't have everything.

Speculative stories presented as fact have no place in my diet of information. There's enough bias and disinformation-at-source to filter out without knowingly getting more from the intermediaries separating me from the source. Granted, GMM is not my brand of vodka (I don't drink vodka, but that's another story entirely...), but quite why anyone would want speculation to look like fact is a mystery. Of course I want to know as much as possible about F1. But taking in inaccurate information that has to be unlearned and replaced in short order gets in the way of that goal, especially since I only have twenty-four hours in a day*.

As for "wondering ahead of time"... ...humans are good at that when left to their own devices. All the likes of GMM can do is direct the path of such wondering. Asking for the direction to be as valid as possible seems reasonable.

De-bookmarking is a problem because of the ubiquity of GMM content across the internet (and, at various times, other erroneous stories). The interconnectedness of the internet can be wonderful at times, but a simple de-bookmark wouldn't remove the content in its entirety. What needs to happen is a better appreciation of how to spot a good story from a bad one, improved story moderation from everyone and a preference for accurate information over inaccurate stuff.

* - Could be worse. In the Triassic period, there were only twenty-three hours per day...

Date: October 26 2007

[ Mood: Sword Fight ]

[ Currently: Reading F1 Racing (August 2007 edition) ]

Date: July 22 2007

[ Mood: Razz ]

[ Currently: Reading Harry Potter and the Deathly Hallows by J. K. Rowling ]