Following a detailed market inquiry, the Competition Authority has blocked NFI Empik's attempt to acquire control over Merlin, Poland's leading online retailer. This is the first time that the regulator has refused to clear a concentration on the grounds that it would negatively affect competition in an online segment of the retail market.
Empik operates a nationwide network of retail outlets which sell a variety of consumer goods, in particular books, multimedia products, music and films. It also runs Empik.com, an online store which carries a similar range of products. Merlin focuses almost exclusively on online retail. It is the oldest and biggest Polish internet retailer and is sometimes referred to as 'the Polish Amazon'.
The transaction between Empik and Merlin was announced in July 2010 and immediately prompted protests from publishers, which claimed that the proposed consolidation would create a quasi-monopoly in the Polish market for books and that the merged entity would be free to impose commercial terms on its suppliers. In view of the scale of the transaction and the controversy that it provoked, the authority began a market study on an unprecedented scale, sending out market questionnaires to more than 1,100 business entities, including 400 retail websites.
Among other things, the study sought to verify Empik's view of the markets in which the parties operate. Empik argued that traditional and online retail sales of books constitute a single product market, as do online and traditional retail sales of recorded music, and that both forms of distribution channel offer a similar range of products at comparable prices. This analysis had to be considered in light of the increasing digitalisation of content and the availability of new technologies, such as video on demand, as these factors exert significant competitive pressure on sales through traditional outlets.
The authority considered the market definitions to be too broad. It argued that online sales of books and music differ to such an extent that it is impossible to claim that there is a single market for book retail and a single market for music retail. Furthermore, within the category of books, the authority identified the following separate and relevant markets:
- retail sales of non-specialist books (including general literature and reference works);
- retail sales of specialist books (ie, professional books); and
- retail sales of academic books.
The authority emphasised that online retail sales differ substantially from traditional sales, and that the parties' positions in the online markets should be considered on a standalone basis. The authority referred to its market study, emphasising that online stores typically have a broader product range than traditional channels and usually offer lower prices. Furthermore, the authority argued that internet access is still fairly limited in Poland.
The authority concluded that the proposed transaction would substantially reduce competition in the market for online sales of non-specialist books and the market for online sales of music on traditional media (ie, compact discs and vinyl). The main concern was that the combined entity would face no viable competition in these areas. The authority noted that:
- the transaction would result in the acquisition of a market leader in an online segment by the next biggest player - this in itself was considered to have far-reaching, negative consequences for competition; and
- the remaining players would be unable to exercise effective competitive constraints on the merged entity if it chose to raise prices excessively or engage in practices that might harm consumers' interests.
Significantly, the authority raised these concerns despite the fact that the market share of the combined entity in the segment of online book sales would be below 40%, which is the threshold for presumed market dominance under Polish law.
The authority also concluded that the consolidation of Empik and Merlin would leave the combined entity free to impose terms on publishers. The authority stated that complaints against onerous trade terms applied by Empik had been raised even before the announcement of the transaction with Merlin. According to the authority, the proposed consolidation would only worsen the position of publishers in respect of the combined entity.
The authority has identified no scope for issuing a decision based on commitments by the parties; nor has it considered whether there might be efficiencies that would outweigh the competition concerns.
Empik has appealed the decision on the grounds that the authority incorrectly defined the relevant product markets by distinguishing between online and traditional distribution channels. Empik also argues that the method used to calculate market shares was erroneous, as it failed to take into account the figures that Empik had provided to the authorities. Moreover, it claims that with respect to a number of markets, the authority considered the parties' positions on the basis of 2009 figures.
Empik and Merlin are very well-known brands in Poland and given the size of the transaction, it was generally expected that the authority would analyse in detail the likely effects of the proposed consolidation on consumers and market structure. Nonetheless, the negative outcome was a surprise to many. The authority has traditionally viewed online markets as dynamic and developing, and has taken a relatively liberal approach to consolidations in this field.
In view of the development of online retail, as well as the ongoing emergence of new technologies for making literature and music available to consumers, the overall negative assessment raises significant doubts for many competition practitioners. It follows from the authority's justification that it has not addressed the future patterns of trade in full detail. Moreover, the authority's stance on a number of issues seems overly conservative - for example, its identification of a separate online market for the retail sale of music on traditional media (ie, compact discs and vinyl) that does not include newer formats or music sold by online stores based outside Poland. It is even debatable whether the addition of Merlin to the Empik group would be materially detrimental to publishers or have a direct negative impact on consumers. These and other issues are now before the Competition Court, which will hear the appeal.
For further information on this topic please contact Krzysztof Kanton or Piotr Borowiec at Soltysiński Kawecki & Szlęzak by telephone (+48 22 608 7000), fax (+48 22 608 7070) or email ([email protected] or [email protected]).