The Vodafone / Sky Network merger is a good illustration of how a competition regulator will assess substantial market power arising from "must have" events such as premium live sports content.
What is one of the ultimate "must have" products in New Zealand? From a recent New Zealand Commerce Commission decision, it seems that one answer is the ability to view All Blacks games.
As an illustration, a recent New Zealand Commerce Commission has blocked a proposed merger that would bundle those Pay TV rights with telecommunications services.
The proposed merger, between Vodafone New Zealand and Sky Network Television, is a good example of a conglomerate merger. Conglomerate mergers involve merger parties that interact across several separate markets and supply goods or services that somehow relate to each other.
Under the Merger Guidelines the ACCC can oppose a merger where a firm buys a business in an adjoining market and gains the ability to bundle products in such a way that can limit or foreclose other competitors from being able to compete because they cannot "match the bundle". This can raise entry barriers, especially where the firm in question can bundle a so-called "must have" product.
The ACCC has only rarely opposed a proposed merger on this basis, the notable example being Coca Cola Amatil's 2003 proposal to acquire Berri Juice. In that matter, the ACCC was concerned that CCA would be able to leverage its market power in soft drink to link sales of the Berri fruit juice products to its Coca-Cola product. The ACCC believed that the likely outcome of combining market leadership across these complimentary products would be that a substantial proportion of certain channels would be foreclosed to competing fruit juice manufacturers.
While the ability to bundle products has been a factor considered in more recent merger matters, the ACCC has not blocked any other mergers on this basis, given the presence of other factors that would constrain the merged firms.
However, the recent decision by the New Zealand Commerce Commission to block Vodafone from its merger with Sky Network Television has once again brought bundling issues to the fore.
The key take away for conglomerate deals in Australia from this decision is to closely consider bundling issues, particularly where one party has a "must have" product. A key question is whether or not the merged firm will have the ability to engage in bundling strategies that may limit or raise the cost of access to a sufficient customer base for competitor firms, or whether the merged firm will be able to deny competitors access to customers altogether.
The NZ Commerce Commission's reasoning
While the Commission's full reasons for opposing the Sky Network Television and Vodafone New Zealand merger are yet to be released, its media release briefly sets out its concerns.
The Commission declined clearance due to concerns that there may be a substantial lessening of competition as a result of the proposed merger. The heart of the concern was premium live sports content and the ability to leverage its importance.
The Commission reasoned that:
- Under the proposed merger, there would be a strong vertically integrated pay-TV and full service telecommunications provider in NZ, owning all premium sports content.
- Around half of all households in NZ have Sky TV and a large number of those are Sky Sport customers.
- The merged entity would have the ability to leverage its premium live sports content with telecommunications offers, and attract a large number of non-Vodafone customers from rivals who could not offer any premium live sports content.
- The potential popularity of the merged entity's offers could result in smaller telco competitors losing or failing to achieve scale to the point that they would reduce investment or innovation in broadband and mobile markets in the future.
- Fibre is also being rolled out in NZ, which makes it an opportune time for the merged entity to entice customers to a new offer.
- If significant switching occurred, the merged entity could eventually have the ability to increase prices, or to reduce the quality of its service because it would face fewer competitors.
While the parties have the option of appealing the regulator's decision in court, Sky TV's CEO has publicly downplayed the prospect.
Why is the Commerce Commission's decision interesting for Australia?
The Commission's decision is very relevant to Australia, given that content is becoming a vital part of the telecommunication sector's future. As an example, in Australia, Optus recently acquired rights to the English Premier League, outbidding Fox Sports and Qatar-owned beIN Sports.
This matter illustrates the potential challenges that holders of "must have" products, such as premium sports rights holders, may face when seeking clearance for a conglomerate merger. Clearly, one of the underlying rationales for such a merger would be to offer differentiated bundles and content to customers, and to cross-sell products to consumers. However, at what point will the merged entity have substantial market power if it has premium live sports content? Will it have the incentive to make buying sports content on a standalone basis less attractive than acquiring such content in a bundle? Will rivals lose customers to such an extent that they no longer provide an effective constraint, eventually allowing the merged entity to profitably raise prices above the levels that would exist without the merger?
These are not easy questions to answer, particularly given that the impact of a merger is looked at over time, and there is uncertainty about how markets will evolve with advances in technology. However, the Vodafone / Sky Network merger provides a good illustration of how such issues are likely to be assessed by a competition regulator.