Month: October 2014

When it was notified in August, the merger between BSkyB and Sky’s German and Italian arms was met with mixed reactions. Several commentators, largely in the media arena, regarded it as an attempt for the acquiring business to streamline its structure and increase corporate value through seeking a “way in” markets that unlike the British one were still showing capacity for expansion. In other courts, instead, the proposed concentration had rung a few alarm bells, due to its temporal proximity to the Murphy preliminary ruling that had de facto outlawed (albeit with limits dictated by demands of protection of intellectual property) the practice of imposing geographic restrictions on the right of subscribers to “make their decoder card travel” across the Union. These concerns had been aired on this blog just after the news of the projected merger had been released: it was argued that a similar merger could have been interpreted as an attempt at de facto allowing the merged entity to engage in practices (such as the imposition of territorial restrictions to pay-TV licenses, condemned by the CJEU in Murphy) that would have been objectionable, had they been resorted to by separate economic entities. Although it was acknowledged that ex post control of prima facie anti-competitive behaviour could have provided a relatively swift and efficient response to these concerns, it was suggested that allowing the merger to proceed could have consolidated practices of territorial segmentation, as opposed to furthering the goal of market integration.

In light of the forgoing, it is difficult to gauge what the implications of the approval of this merger are likely to be: the press release detailing the key aspects of the Commission decision point to the “geographical complementarity” of the activities performed by each of the merging parties as one of the main justifications for approving the merger.  In its view, the merged entity would not have been able to increase its economic strength to any significant degree on each of the affected geographic markets;  the Commission drew a very clear distinction between the market for the licensing of audio visual programmes free to air or pay TV to individual users and that for the acquisition of the broadcasting rights concerning these programmes.  Having regard to the former, the Commission excluded the existence of concerns for competition, on the ground that the parties were active in sufficiently independent national markets, due to their linguistic and cultural internal homogeneity, as not to give rise to overlaps and, after the merger, to any loss of competition between them vis-a-vis the sale of individual subscriptions.

Broadly similar conclusions were adopted in respect of the impact of the merger on rivalry vis-a-vis the acquisition of TV broadcasting rights: the Commission found that the current licensing practices were directly linked to “national territories or language areas”.  In other words, a combination of “practical obstacles”, such as different deadlines governing bidding procedures for the assignation of these rights, and of long-standing adherence to a model of licensing based on single territories meant that the merging parties, would have continued to acquire broadcasting rights each in their own geographic market; in the Commission’s view, unless evidence could be found that “multi-territorial licenses” were capable of securing higher revenues, it would have been unlikely that the merged undertaking would have deviated from “individual nation” licensing practices.  And finally, the Commission added that in any event even if the holders of the broadcasting rights had decided to grant “multi-territorial” licenses the merged entity would have faced stiff competition from a number of  rival broadcasters active across the EU, all vying for the same number of licenses.

It is suggested that the outcome of the “summary” examination of the merger is not entirely unexpected: it is accepted that both the acquisition of the rights to broadcast TV programmes, movies and sports events and the supply of licenses to end users who  may wish to view this “paid for”content are organised on the basis of well-defined geographic areas, each of which tends to be identified with an individual member state or, for those states sharing the same language, the same “linguistic area”.  Consequently, it is to an extent inevitable that even after the concentration the merged entity would continue to operate through its Italian, German and UK and Irish arms in appreciably homogeneous and therefore reciprocally distinct markets.  What is, however,  unclear is the extent to which the rationale for these findings can be reconciled with the approach adopted in Murphy by the CJEU.

It should be borne in mind that at the heart of that judgment was a concern for avoiding the segmentation of the common market by restricting the right of holders of legitimately acquired and used decoder card to enjoy the broadcasting services anywhere in the EU: although the CJEU had acknowledged that this right should be limited to preserve the integrity of copyright and of other intellectual property rights that were “independent” from the broadcast, it had taken the clear view that licensors could not limit the geographic scope of the license and thereby extract a “premium profit” in states where broadcasts of specific sports events were regarded as a particularly “prized commodity”.  It is argued that the Court’s assessment of the FAPL’s and BSkyB’s licensing practices were predicated, to an extent, on an understanding of the relevant market as one whose boundaries are not necessarily restricted to single Member States or well-identified linguistic territories, but rather as one spanning across the Union taken as a whole–in other words, it could be legitimately argued that the Court, faithful to its commitment to the “single market imperative”, chose to uphold the rationale of free movement of services and, more generally, the demands of open markets that cannot be constrained by national boundaries.  It is in fact clear from, among others, para. 139, where the Court rather unsurprisingly referred to practices aimed at recreating the national boundaries among member states as very serious infringements of Article 101 TFEU.

Against this  background, to what extent can the decision approving the BSkyB/Sky Deutschland/Sky Italia concentration be reconciled with the Court’s own assessment of territory-based licensing practices, whose ubiquity in the industry and in the case at hand seems to have provided much of the justification for the approval of the merger?  It is beyond doubt that in its approval decision the Commission expressly accepted that present and future licensing practices would be inspired by “territorial” principles–in other words, that the merged entity would likely continue to operate through its “national arms” in their respective geographic and linguistic areas both on the “demand side”, i.e. when seeking to bid for and adjudicate contracts concerning new broadcasting rights, and on the “supply side”, that is when vying for business among end users on the retail market.  This conclusion can be contrasted with the position adopted by the CJEU in the Murphy preliminary ruling, where the Court expressly outlawed territorial restrictions on broadcasting licenses (especially in respect of decoder card usage) as not only injurious to the functioning of the single market but also as eminently anti-competitive: in light of this, and if the merger decision in issue was taken at face value, two options could potentially be envisaged.  Either the EU Commission has decided to veer slowly but steadily away from the EU Court of Justice’s position as expressed in Murphy, perhaps out of a concern for remaining within the limits of its powers of “ex ante appreciation” of notified mergers.  Or the Commission has made a conscious effort to “fit” the assessment of an admittedly relatively wide-ranging and controversial concentration within the scope of the Murphy judgment itself.

It is submitted that the second option appears more likely to find a justification: first of all, it should be reminded that, when reviewing a merger, the Commission engages with an ex ante analysis of the notified concentration.  Accordingly, it is not concerned with possible infringements of competition law that the merged entity could commit post-clearance, but rather, its assessment focuses on the extent to which as a result of the concentration competition would be significantly impeded.  In this specific context, a careful assessment of the confines of the relevant market, especially from a geographic point of view, is especially important: on this point, it should be emphasised that, by their very nature broadcasting services can only be provided in a specific language, which in turn limits their fruition to a well-defined national or “linguistic” area.  Accordingly, it is argued that the Commission’s finding that the notified concentration would not significantly hamper rivalry can be justified on account of a careful definition of the relevant market, which reveals contours that are genuinely national, on account of the eminently “language dependent nature” of broadcasting and of the often significant differences between the rules governing the award of these rights in each Member States; as a consequence, it is submitted that the findings of the Commission appear fully justified when it comes to the actual assessment of the concentration on each relevant market, both on the “supply” and on the “demand side” of it.

However, this is not the end of the story: as was suggested earlier, it may be wondered whether the future of a “single market for broadcasting services”, envisaged by, inter alia, the CJEU in Murphy, is to an extent under threat after the merger, on account of the recognition that, even after the emergence of a “multi-national conglomerate”, such as the merged entity, licdensing practices are likely to remain national in nature.  Admittedly, this is not, strictly speaking, a question that should be relevant when it comes to assessing the lawfulness of the concentration, but rather, an issue that affects the post-merger conduct of the merged entity.  In light of the forgoing analysis, should the merged entity seek to stipulate “pan-European” licenses, estensibly to conform to the principles enshrined in Murphy? Or would it still be justified in relying on “national” or “language based”  contractual arrangements with its customers?  It is suggested that the answer to this question lies once again in the Murphy preliminary ruling: in that decision the Court itself acknowledged that arrangements resulting in the partitioning of the internal market will be found to infringe Article 101 TFEU unless “(…) other circumstances falling within its economic and legal context justify the finding that such an agreement is not liable to impair competition (…)”.

It emerges from the Commission’s clearance decision that by their very nature broadcasting services can only be provided in a specific language, which in turn limits their fruition to a well-defined national or “linguistic” area.  Accordingly, it may be argued that the continuing reliance on “national” as opposed to continent-wide arrangements which are stipulated and implemented by each of the “national arms” of the merged entity, may fall within those practices that, as stated in Murphy, are not “liable to impair competition”.  In other words, the eminently “language-dependent” nature of broadcasting services, together with the need to take into account national preferences in the choice of the broadcasts to be supplied to users in specific areas would form part of the “legal and economic context” of the licensing practices adopted by each of the merging parties, thus excluding at least in principle their anti-competitive nature.

However, it is suggested that this does not mean that the “implementation” of these licensing agreements may in certain cases infringe Article 101 TFEU: it is argued that this would likely be the case if, as it occurred in Murphy itself, the licensor placed restrictions on, e.g., the use of decoder cards or other devices that resulted in an impairment of the freedom of movement of these services from one Member State to the other.  Similar conclusions could also be reached if the licensor was able to extract from certain licensees, resident in certain Member States, fees that are so high as to earn it a “premium profit”, something that is especially stigmatised by the preliminary ruling.

In conclusion, can it be said that it is “mission accomplished” for BSkyB in Europe?  Clearly, the Commission seems to think so, on account of a definition of the relevant markets that, not unwisely, emphasises their eminently “national” and language-dependent” confines.  However, these very same considerations seem also to demand a high degree of vigilance on the part of the competent competition agencies, to prevent the merged entity from resorting to practices whose impact on competition goes beyond what is consistent with the “legal and economic context” that characterises the broadcasting industry in Europe.

In many ways, it could have been predicted–when last February Commissioner Almunia announced that a settlement had been reached as regards the allegations of abuse of a dominant position made against Google criticism was almost inevitable (see: http://www.clie.law.ed.ac.uk/2014/02/28/when-is-an-anti-competitive-practice-truly-of-serious-concern-the-google-commitments-decision-leaves-this-and-other-questions-open/ for what had been said on this blog). The perceived lack of “proper and exhaustive” market testing for the commitments agreed by Google, the reliance on Article 9 as a way of addressing the consequences of what was clearly a serious prima facie infringement and, more generally, the absence of a “proper finding” as to whether these allegations had been well-founded were all raised as areas of grave concern as to the response to the Commission’s decision.

Against this background, one could legitimately wonder whether the recent decision to reopen the Google file (see e.g. http://www.theguardian.com/technology/2014/sep/08/european-commission-reopens-google-antitrust-investigation-after-political-storm-over-proposed-settlement for an agile summary of the decision and surrounding events) may be the result of deeper reflection and analysis of the evidence that was available at the time of the commitments decision and also of the outcome of more recent market testing.  In his speech at the Conference on International Antitrust law and policy (see: http://europa.eu/rapid/press-release_SPEECH-14-592_en.htm) Mr Almunia openly acknowledged that “new arguments and elements” had been provided by interested parties in the course of more exhaustive market testing of the remedies package being devised for Google; as a result, in his view the Commission was fully justified in re-opening the investigation on the strength of the new evidence: in the Commissioner’s words, “every time I have talked about Google’s proposals as a basis for an Article 9 decision, I’ve always made clear that it was without prejudice of the complainant’s arguments”.   Seen in this light, it could be argued that the scope of Article 9 and the substance of the decisions adopted on the basis of this provision acted as something akin to a safety valve, since they provided the Commission with the framework within which to re-assess, against the background of fresh evidence, whether the initial commitments’ package was an appropriate response to the competition concerns arising from Google’s conduct as regards the integration of its own sale services within its search engine facility.  In this context the flexibility offered by Article 9 has permitted fresh investigations as to the existence or otherwise of an abuse of a dominant position, something which a more formal outcome would not have allowed.

It is however still unclear whether this can be regarded as an advantage stemming from the adoption of a less formal commitments decision or as a symptom of the fact that its flexibility comes at the cost of a less exacting and in-depth assessment of the evidence which(often in hindsight and at a later stage) may (and as in this case often does) point to the existence of a prima facie more serious infringement of the competition rules.  More generally, it is at least questionable whether the limitations stemming from Article 9 as regards legal certainty and finality in individual cases can be justified by the concern for providing fast-moving and often complex markets with “quick fixes” whose effectiveness may be limited in time, due to the very nature of the industries concerned.  When Council Regulation No 1/2003 was enacted Article 9 decisions were regarded as a way of tackling the anti-competitive impact of practices that were perceived as being “less serious”.  In these circumstances, it could have been thought that leaving it to the goodwill of a dominant company to modify its commercial practices and thereby to neutralise any restrictive effects on rivalry would have represented an “acceptable compromise” between concerns for maintaining the integrity of competition on a given market and demands of expeditiousness in the design and imposition of commitments.  However, what emerges starkly from the Google story so far is that, once Article 9 decisions are relied upon outside the remit for which they were originally thought, the consequences cannot be fully predicted: it is in many ways to the credit of the outgoing Competition Commissioner that the EU competition officers have been willing to reopen such a controversial case after taking on board the outcome of the market testing phase of the projected commitments.  Nonetheless, it cannot be doubted that in a fast-moving industry like the one for the provision of search engine and internet sales services the lapse of time between a “provisional solution”, such as that envisaged in February 2014 and a future, more “final” decision, which is not likely to see the light before early next year, may increase the risk that any remaining rivalry be irremediably compromised.

It is acknowledged that, as the General Court admitted in the Microsoft/Skype appeal judgment (Case T-79/12, judgment of 11 December 2013), any position of market power held on fast-changing industries, such as those for the provision of internet services (in that case, of Voice-Over-Internet communications) are less likely to endure than in more traditional markets; thus, it could be suggested that any anti-competitive effect stemming from the conduct of companies enjoying such positions may also be of limited duration.  However, in consideration of the network effects characterising these industries and of the potentially irreversible impact of this “feedback loop” it is argued that there is an inevitable risk of compromising any residual competition, if no decisive intervention is resorted to within the short to medium term.

In February it had been suggested on this blog that “(…) the Commission may have chosen to adopt an approach to these issues that is more “responsive” to the nature of the market and to the demands of consumer welfare in a case which could have warranted a less “expensive” (especially in monitoring terms) and perhaps more forceful solution (…)”.  Maybe, it is this more “forceful” response to the concerns arising from Google’s conduct that the Commission will seek to identify now that it goes about engaging with the outcome of the market testing initiated at the beginning of 2014.