On 26 October 2017 the General Court delivered its judgment in KPN BV v European Commission1, finding in favour of KPN in its challenge to the European Commission’s October 2014 decision to conditionally approve the acquisition of Ziggo NV by Liberty Global plc. The General Court held that the Commission’s decision to clear the merger must be annulled on the basis that it is vitiated on procedural grounds. The General Court upheld KPN’s second plea, namely that the Commission had breached its duty to state reasons concerning the lack of analysis of possible vertical anti-competitive effects on the market for premium pay TV sports channels. The General Court made no findings in relation to KPN’s other two pleas relating to alleged manifest errors of assessment.

Background

On 10 October 2014 the Commission approved Liberty Global’s acquisition of Ziggo under Article 8(2) of the EU Merger Regulation following the completion of its Phase II investigation. Liberty Global is an international cable operator which owns and operates cable networks offering TV, broadband internet, fixed telephony and mobile telecommunications services. Liberty Global is active in the Netherlands through UPC Nederland BV, which distributes the pay TV channels Sport1 and Film1 in the Netherlands. Similarly, Ziggo owns and operates a broadband cable network that covers more than half of the territory of the Netherlands, offering pay TV channels and other mobile, telecommunications and entertainment services.

Phase II investigation and resulting commitments

During its original investigation, the Commission reviewed the impact that the merger would have in a number of key markets relating to the pay TV sector, given the nature of the two merging parties’ respective businesses. It concluded that the proposed transaction would present a horizontal competition issue in relation to premium pay TV film channels. Absent any remedies to address the issue, Liberty Global would have owned, post-merger, the only two premium pay TV film channels (Film1 and HBO Nederland) and 75 per cent of premium pay TV channels (Film1, HBO Nederland and Sport1). The Commission further identified that, in relation to vertical competitive effects concerning premium pay TV film channels, Liberty Global would have been able to refuse access to its Film1 channels to its retail competitors. In response to these concerns, the Commission’s merger clearance was conditional on a commitment by Liberty Global to divest Film1 in order to remedy the entities’ overlap in the premium pay TV film channels market in the Netherlands.

The investigation also focused on the impact of the transaction on the downstream market for the retail supply of pay TV services. The combination of Liberty Global and Ziggo would entail merging the two largest cable operators in the Netherlands which, as such, was expected to represent at least 60 per cent of pay TV subscribers. This posed a competition issue for the Commission as Liberty Global, in its capacity as a purchaser of the TV channels included in these pay TV subscriptions, would have increased buying power which could threaten innovation. The Commission was concerned that Liberty Global would be able to limit the innovative services provided by TV broadcasters, such as “over-the-top” services delivered online. As a result, the Commission accepted commitments requiring Liberty Global to terminate any contracts with TV broadcasters that limited the broadcaster’s freedom to deliver its content via “overthe-top” services in the Netherlands and to refrain from contracting on that basis going forward.

KPN’s challenge and the General Court’s decision

KPN operates in the Netherlands in the TV cable networks sector, the broadband internet market and in fixed telephony and mobile telecommunications services. KPN sought to challenge the Commission’s approval of Liberty Global’s acquisition of Ziggo on the following grounds:

(i) The Commission made a manifest error in the assessment of the vertical effects of the concentration on the market for premium pay TV sports channels.

(ii) The Commission breached its duty to state its reasons for not assessing the possible vertical anti-competitive effects on the market for premium pay TV sports channels.

(iii) The Commission made a manifest error in its assessment in relation to the role and influence of Liberty Global’s largest minority shareholder over other entities active in the same market.

The General Court found that the Commission failed to state its reasons in relation to potential vertical effects in the premium pay TV sports channels market and therefore did not review KPN’s two challenges relating to alleged manifest errors of assessment.

In its clearance decision, the Commission had found that there was no horizontal overlap in the premium pay TV sports channels market as Ziggo was not active in this market, Liberty Global already owned Sport1, and Fox Sport – the other premium pay TV sports channel – was not part of the proposed transaction. KPN contended, however, that the Commission did not explain why a mere lack of horizontal overlap implies that the merger would not produce vertical effects. KPN argued that the concentration was likely to give rise to vertical effects given that Liberty Global would cover 90 per cent of the territory of the Netherlands and that Sport1 is an essential input for downstream competitors. According to KPN, the Commission did not state its reasons for not analysing the risk of foreclosure by Liberty Global, as a wholesale supplier of a premium pay TV sports channel (namely Sport1), of access to that input by downstream competing distributors (for example, KPN).

Conclusions

The General Court upheld KPN’s arguments in relation to the second plea, finding that the decision fails to analyse the impact of the deal on the possible market for the wholesale supply and acquisition of premium pay TV sports channels. While the decision did refer to Sport1 and Fox Sports, it did not analyse the vertical effects which would arise out of the proposed concentration if the relevant product market were defined as that of the wholesale supply and acquisition of premium pay TV sports channels. The General Court therefore found that all references to Sport1 and Fox Sports were made within another analytical framework.

Although the Commission had left open the precise market definition, the General Court held that the Commission was nonetheless required to explain, at least briefly, why the proposed deal did not present any issues, including with respect to vertical effects on this narrower market. As a result of this annulment, the transaction needs to be re-assessed in the light of current market conditions.2 While the General Court’s decision is unusual in overturning the clearance decision on the basis of purely procedural grounds, it does not seem that the judgment in this case introduces a more onerous standard by which the Commission must abide. The General Court states that “[i]t is not necessary for the reasoning to go into all the relevant facts and points of law” nor must the Commission “define its position on matters which are plainly of secondary importance”, but it must nonetheless “set out the facts and the legal considerations having decisive importance in the context of the decision”.3 Nonetheless it is possible that, going forward, the Commission may take a more cautious approach towards setting out its reasoning.