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AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

MEDIA MERGERS

August 2006

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Important notice

This paper sets out the framework that the ACCC intends to use to assess future media mergers. In particular, the paper indicates the ACCC’s approach to defining media markets.

The paper also provides examples of how the ACCC’s framework might be applied in various circumstances. These examples are included for illustrative purposes only and do not indicate the likely outcomes of future merger investigations.

The views expressed in this paper do not constitute legal advice. Companies considering pursuing a merger or acquisition should obtain private legal advice if they believe this necessary.

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Abbreviations

ACMA Australian Communications and Media Authority

ACCC Australian Competition and Consumer Commission

BSA Broadcasting Services Act 1992

FTA Free-to-air

IPTV Internet protocol television

TPA Trade Practices Act 1974

CCA Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974)

Cross-media merger Cross media mergers that are currently prohibited could take place between companies owning:

• a free-to-air (FTA) television station licence and a radio station licence in the same [regional area];

• a FTA television station and a newspaper [in the same regional area]; or • a radio station and a newspaper [in the same regional area].

Note on terminology

Section 50 applies to: • mergers, where typically the shareholders of two companies (the merger parties)

become the shareholders of the new merged company; and • acquisitions, where a company (the acquirer) acquires the shareholding or assets of

another company (the target). For convenience, this paper refers only to ‘mergers’ and ‘merger parties’.

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Executive Summary

Following the release of the Government’s discussion paper, Meeting the Digital Challenge: Reforming Australia's media in the digital age, the ACCC has undertaken to provide broad guidance to industry and the public as to how future cross-media merger proposals might be assessed and the ACCC’s approach to defining media markets.

This guidance is timely for two reasons.

First, the Government has proposed changes to Australia’s cross-media ownership laws. Importantly, the Government has made it clear that media mergers would be subject to section 50 of the Trade Practices Act 1974, now (and hereinafter) the Competition and Consumer Act 2010 (the Act), which prohibits mergers that substantially lessen competition. The ACCC will investigate proposed media mergers to determine whether they might raise competition concerns.

Second, the media industry is changing as technology improves. While these changes are in their early stages, there is little doubt they will continue and change may at times be rapid. Changes in technology, changes in consumer behaviour, changes in the way that media are delivered, and changes to media content are altering the nature of competition in media markets.

The media merger guidance provided in this paper however, can only be general in nature. As is the case with all merger analysis, the individual circumstances and competitive implications of each media merger proposal will need to be considered when the ACCC considers requests for informal clearance in accordance with its Merger Review Process Guidelines.

The media sector, like all other sectors of the economy, has its own unique characteristics that will need to be considered in a merger investigation. The ACCC’s informal clearance process enables these characteristics to be identified and given proper weight when determining whether a merger is likely to substantially lessen competition or not.

When assessing media mergers, the ACCC will base its assessment on what a market is likely to look like in the next two or three years. Analysis will be based on hard evidence, not hypothetical views of what the future might look like. This means that:

• media mergers that, based on the best current evidence, are unlikely to substantially lessen competition should not be hindered based on mere speculation of what technology might bring in the future, and

• media mergers that, based on the best current evidence, are likely to substantially lessen competition will not be cleared on the basis of mere speculation about future technological developments. As traditional media boundaries blur, focus may shift from the way information is delivered to the actual products media companies offer. In this regard, there are three main categories the ACCC will consider as part of its assessment: the supply of advertising opportunities to advertisers; the supply of content to consumers; and the acquisition of content from content providers.

Other more specific products—such as premium content; classified and display advertising; and the delivery of news, information and opinion—may also be critical when considering particular mergers.

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In the past, the ACCC has regarded the media as four distinct products—free-to-air television, pay television, radio and print. Those products have been thought of as having little overlap in content or advertising.

Convergence of technology means we can no longer take that view. Some advertising and content is now being packaged across a number of delivery platforms such as newspapers, 3G mobile phones and internet news sites.

The capabilities of new media are forecast to increase significantly in the future, particularly in relation to the delivery of audio-visual content. The ability of consumers to access new media is also likely to increase, particularly as access to high-quality broadband improves. Consequently, new media will become an increasingly important part of the media sector generally.

New technology has the effect of broadening the reach of some but not necessarily all media. Nor is the reach of the media broadening in every part of Australia.

The key element when determining whether different media are in the same market for merger analysis is substitution. For example, when considering the supply of content to consumers, if the price of one source of content rises, or its quality falls post merger, what are the real alternatives for consumers? Similarly, when considering classified advertising, does online advertising provide a real alternative to print classified advertising and vice versa?

The control of content is an important part of media competition. Competition will not be best served if companies providing new services—those who control the pipes used to reach audiences—are all purchasing similar content from the same, small group of suppliers. If traditional media companies emerge as dominant players in new media and control the key content, then the potential for emerging players to provide competition is at risk.

Section 50 of the Act specifically requires the ACCC to consider the impact of proposed mergers on markets in regional Australia. Consequently, the ACCC will take into account the differing circumstances in rural and regional Australia compared with urban areas. Consumers in regional areas rely heavily on local suppliers of news and information, as compared to consumers in urban areas who have greater access to a variety of media outlets, including new media. Competition in those local markets may be more vulnerable following a merger than competition in the larger cities. As such, the ACCC will continue to consider implications at the local and regional level when assessing mergers proposed for those areas.

It is impossible to pre-empt whether a particular television station may be given informal clearance to merge with a newspaper or radio station until the markets that both businesses operate in are thoroughly analysed in a merger investigation conducted at the time clearance is sought.

A key purpose of the Act is to protect competition in markets in Australia, including media markets. Media diversity is primarily protected by the restrictions on cross-media mergers in the Broadcasting Services Act.

However, the ACCC will consider the impact of media mergers on market concentration, and therefore on the number and market share of media outlets in a market. The ACCC will also consider whether a merged media business could exercise market power by reducing the quality of the content it provides consumers, which could include reducing the diversity of the content it provides. However, the ACCC must also, among other things, assess the ability of new players to enter the market. If barriers to entry are low, then a merger leaving few media outlets in a market might not raise competition concerns.

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Ultimately, whether or not protecting media competition will maintain the current level of media diversity in Australia will depend on the outcome of individual media merger investigations undertaken by the ACCC. As indicated above, it is not possible to indicate now what these outcomes might be.

As markets continue to evolve, so too will the ACCC’s analysis and the factors it takes into account. The ultimate test however will remain: whether a merger will lead to a substantial lessening of competition.

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Introduction

Proposed reforms to cross-media laws

1. On 14 March 2006, the Hon Helen Coonan MP, Minister for Communications, Information Technology and the Arts, issued a Discussion Paper on Media Reform Options.

2. The Discussion Paper states that the Australian Government’s preferred options include: • to amend existing restrictions on cross-media mergers in the Broadcasting Services

Act 1992 (BSA) to allow cross-media transactions to proceed, subject to there remaining a minimum number of commercial media groups in the relevant market—four in regional markets and five in mainland state capitals;

• to retain existing limits on broadcasting licences: a maximum of two commercial radio licences in a radio licence area; one television licence in a licence area, and no more than 75 per cent national television reach;

• to remove the current media-specific foreign ownership rules in the BSA and the current newspaper-specific foreign ownership restrictions in the Foreign Investment Policy under the Foreign Acquisitions and Takeovers Act 1975. The media would be retained as a ‘sensitive sector’ under the Foreign Investment Policy. Proposals by foreign interests to directly invest in the media sector, irrespective of size, would remain subject to prior approval by the Treasurer.

3. The Government’s preferred option is for media mergers to remain subject to the general mergers provisions of the Trade Practices Act 1974 now (and hereinafter) the Competition and Consumer Act 2010 (the Act), and for the ACCC to continue to assess the competitive impacts of transactions, in accordance with the requirements of the Act.

4. As regards the preferred options for implementing the Government’s media ownership reform proposals: • the media ownership reforms could take effect following automatic changes to the

regulatory framework in 2007 that would allow new licences for digital services on reserved spectrum to be allocated; and

• alternatively, media ownership reforms could be linked with the end of the analog/digital simulcast period proposed for between 2010 and 2012, in line with the Digital Action Plan proposed in the Discussion Paper.

5. The Discussion Paper also states that the Government will ask the ACCC to articulate its proposed approach to media mergers, particularly in relation to those factors that will affect its definition of media markets. The Minister for Communications, Information Technology and the Arts, the Hon Senator Coonan, has since written to the ACCC making this request.

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Purpose of this paper

6. The ACCC has prepared this paper in response to the Government’s request. The purpose of the paper is to provide guidance on the ACCC’s likely approach to cross-media mergers in light of the requirements of section 50 of the Act. In particular, this paper highlights the type of framework that the ACCC would use to delineate the markets that are relevant for analysis of cross-media mergers and assess implications for competition in those markets under section 50 of the the Act.

7. The paper is intended to ensure that prospective merger parties are aware of the issues likely to be of interest to the ACCC when assessing a media merger so that parties can form a view on their prospects of gaining an informal clearance.

8. The paper does not, and cannot, indicate, whether particular hypothetical media mergers might substantially lessen competition. It cannot be definitive about likely market definitions. These questions can only be answered once the ACCC has had the opportunity, after receiving a request for informal clearance, to comprehensively investigate a proposed merger, including by making market inquiries. The dangers of pronouncing on hypothetical mergers (that might only occur, if they occur at all, well into the future) are underlined by the rapidly-evolving nature of media markets.

The role of the ACCC

9. Section 50 of the Act prohibits acquisitions of shares or assets that would have the effect, or be likely to have the effect, of substantially lessening competition in a substantial market in a state, territory or region of Australia.

10. If the ACCC considers that an acquisition contravenes section 50 of the CCA and the parties do not agree to modify or abandon the acquisition, the ACCC can apply to the Federal Court for an injunction, divestiture or penalties.

Competition and media diversity

11. A key purpose of the Act is to protect competition in markets in Australia, including media markets. Media diversity is primarily protected by the restrictions on cross-media mergers in the BSA.

12. Having said this, the ACCC will consider the impact of media mergers on market concentration, and therefore on the number and market share of media outlets in a market. The ACCC will also consider whether a merged media business could exercise market power by reducing the quality of the content it provides consumers, which could include reducing the diversity of the content it provides.

13. However, the ACCC must also assess the ability of new players to enter the market. If barriers to entry are low, then a merger leaving few media outlets in a market might not raise competition concerns.

14. For example, in 2005, West Australian Newspapers Holdings Limited (WAN) proposed to acquire the Mid West Times, a free, weekly home-delivered newspaper published in the Geraldton region of Western Australia. WAN owned the other free weekly regional

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newspaper in the market (the Mid West Mail). The ACCC did not oppose the acquisition because it considered that barriers to entry were low.

15. Ultimately, whether or not protecting competition in media markets will maintain the current level of media diversity in Australia will not be clear until the outcome of actual media merger investigations is known.

Overview of the paper

16. This paper includes the following sections: • Part A briefly considers the issue of technological change and how this impinges on

merger analysis in the media industry. • Part B provides the framework that the ACCC uses to define media markets. This

framework is flexible and able to accommodate a wide range of media mergers. At the same time it is sensitive to distinctions that arise between particular consumers and product types.

• Part C applies the market definition framework developed in part B to a number of broad examples to illustrate how it can be used to consider the effect of media mergers on advertising, content provision and content acquisition.

• Part D outlines how the impact of a proposed merger on competition media markets would be assessed.

• Attachment 1 provides a brief general overview of merger analysis under the section 50 of the Act. Readers who are unfamiliar with the merger provisions in the Act and precedent relating to merger analysis may find this overview of assistance.

• Attachment 2 provides a brief discussion of issues relating to content acquisition and how these issues may impinge on the development of inter-modal competition in media.

17. Traditionally, the media has been delineated by modes of delivery so that, for example, radio has been considered in a separate market to newspapers and free-to-air (FTA) television for merger analysis. Broadly speaking there are currently six modes of delivery for media: print media (such as newspapers and magazines), radio (via wireless platforms), FTA television (via wireless platforms), pay-TV (via cable or satellite), online media (using the internet as a delivery platform) and other wireless media, most notably via mobile phones.

18. Technological advances, in particular the digitisation of content, is leading to some convergence between the types of content that can be carried by different modes of delivery, although the degree of convergence differs depending on the type of platform, the relevant use of the platform and the geographic scope of service delivery.

19. In addition, technology is leading to the development of new types of content, such as interactive media and online ‘rich media’ combining text, audio and visual material, which consumers may at some point demand as substitutes for traditional forms of media.

20. While these developments are in the early stages, they may have a profound effect on the markets relevant for analysing some media mergers over the coming decade. Indeed,

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these developments are already blurring the traditional modal distinctions that have been used to distinguish media markets.

21. Media is often also delineated by product type. There are three broad product categories that are likely to be relevant when considering a media merger: the supply of advertising opportunities to advertisers, the supply of content to consumers, and the acquisition of content from content providers. Clearly, these functions operate at different functional stages of the production process. Further, from the perspective of a media provider, the provision of these products is interdependent. In particular, the price that a media provider can charge for advertising depends on the number of consumers that will be accessed by the advertiser. This in turn will generally depend on the price and quality of the content provided on the media platform.

22. The three broad product categories may be further subdivided in particular circumstances. Thus, for example, sport advertising or news content may delineate relevant product markets in some situations.

23. While technology is leading to convergence in the modes of delivery, there is little evidence that technology is significantly changing the boundaries between product categories. While some advertising markets may broaden over time to encompass, for example, both newspapers and the internet, it seems likely that advertising products will, by and large, remain distinct from the content that uses the same mode of delivery.1

24. The geographic extent of a relevant media market depends on the geographic scope for substitution. Technological developments tend to broaden the reach of some media products. However, this broadening is not uniform and, for some media products, the relevant markets for merger analysis are currently localised, particularly in rural and regional Australia. These local markets are likely to continue for the foreseeable future and will impinge on media mergers in rural and regional Australia.

25. Technological changes clearly impinge on both the nature of media and the time frame for analysis of the competitive effects of a media merger.

However, media mergers cannot and should not be determined on the basis of wishful thinking about technology rather than hard evidence. Media mergers that clearly substantially lessen competition today should not be sanctioned simply on the basis that possible technological developments may reduce these anticompetitive implications in the future. At the same time, media mergers that do not substantially lessen competition on the basis of the best available current evidence should not be hindered due to speculation about either potential future technological developments or changes to the media industry.

1. It is worth noting that there are some, albeit highly limited, examples of content and advertising products blurring. One example is the use

of ‘viral’, or ‘word of mouth’, marketing in which advertisers develop desirable online advertising content which is distributed directly by viewers within their own social networks.

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Part A: Technological advances in the media sector

26. Before considering the framework that the ACCC would use to analyse media mergers, it is important to briefly consider the types of technological changes affecting the media sector. As technology alters the way that media reaches end users, it alters the competitive landscape, opening up new areas of competition but also, potentially, eliminating some types of competitive interaction.

27. This section provides a brief overview of some of the relevant technological changes. It is neither comprehensive nor conclusive, but rather aims to illustrate to the reader the type of technological advances that will impinge on media merger analysis.

Changes to media delivery modes

Online Media

28. The most obvious technological advance to affect media services in the past decade is the development of the publicly accessible internet.

29. Internet usage has increased rapidly. The majority of Australians now have regular access to the internet at home. In 1996, just 19 per cent of Australian households had access to the internet. In 2006 this figure had grown to 67 per cent. Meanwhile, as broadband services become increasingly available and affordable, users are shifting from dial-up internet access to broadband access with significantly faster download speeds. By the end of March 2006, take-up of broadband services in Australia was 3.16 million, an increase of 78 per cent over the previous year. PricewaterhouseCoopers forecasts that broadband will reach 448 million households globally by 2009.

30. The digitisation of print, audio and visual content allows it to be delivered simultaneously to consumers over the internet. Consequently, consumers can now access all forms of content otherwise delivered separately over the traditional modes of delivery (newspapers, radio and television) via a single delivery mode. For example, consumers can access web-based television or streamed radio broadcasts from the other side of the world. Currently, the internet connection speeds that are widely available to consumers limit the accessibility of certain types of content, particularly high bandwidth content such as streamed audio-visual material. However, current trends in technological developments and investment suggest connection speeds should continue to increase, making such content more readily available.

31. The ability of the internet to provide ‘two-way’ or ‘any-to-any’ connectivity has altered both the type of content available to consumers through online media and the way this content is disseminated and consumed. The internet enables consumers to contribute content as well as receive content. It also allows consumers to interact with and modify existing content in a way not possible for content distributed using traditional modes of delivery.

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Print media

32. The traditional print-based, hardcopy newspaper has been altered by technological changes. All major Australian newspapers have developed websites that provide print content, often supplemented by limited audio and/or audio-visual content. Information on these websites can be updated regularly and searched easily, and consumers can interact with the content to a much greater degree, such as through on-line reader polls and discussion forums.

33. Newspaper-based websites face increased competition for consumers relative to traditional hardcopy newspapers. First, a variety of websites other than newspaper-based websites provide print news coverage (often with audio and visual coverage as well). The ABC Online, NineMSN and CNN are examples. Second, geographic location no longer limits delivery—foreign news websites are accessible from Australia. Third, search engines, such as Google News enable consumers to target specific stories of interest from a variety of news sources such as Reuters as well as from newspaper sites while general web searches allow consumers to rapidly access original sources, such as government documents, bypassing journalistic summary and interpretation altogether.

34. Newspapers also face increased competition for advertising as a result of these developments. The availability of online search engines and the integration of text and visual content on the internet have meant that online classified advertising is more attractive to some consumers than the traditional print versions. In addition, the success of specialised employment and real estate websites suggests that this kind of advertising need not be bundled with news and entertainment content.

Radio

35. Radio has traditionally had a significant advantage of providing the only widely available source of mobile ‘real time’ entertainment, news and information. Of course, technology has been eroding this unique position for some decades through the development of first the ‘8 track’ cassette, then the compact cassette and more recently through CD and MP3 players.

36. Radio’s traditional dominance in audio media is further being eroded by the development of new portable media and wireless technology. The latter is discussed below. The former includes applications such as podcasts that allow consumers to access audio, including but not limited to radio programs, from home and then replay them on mobile devices.

37. Radio has responded to the erosion of its previously unique position by expanding into new media, such as the internet and podcasting. For example, some radio stations have commenced streaming radio over the internet or allowing ‘time-delayed’ access to programs by establishing on demand delivery through their internet sites. Content complexity in audio programming has also increased. For example, digital radio broadcasts allow for ‘local’ messages to be inserted in ‘national’ broadcasts. In Europe this ability is used, for example, to provide localised traffic updates to motorists.

38. The internet has also allowed radio stations to reach more easily a geographically dispersed audience. In the (not too distant) past a consumer in Australia could only access the scheduled BBC world service from any location if they possessed a

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specialised short-wave radio and had adequate reception. Now a consumer with a wireless-enabled laptop computer can access on-demand BBC audio programming, supplemented by print and video content, from numerous wireless ‘hotspots’ in urban Australia.

Television and pay-TV

39. Currently, the speed of broadband services available in Australia limits the accessibility and/or quality of audio-visual content over platforms other than terrestrial wireless, satellite or cable, and then only using the traditional delivery modes of FTA and subscription television. However, it is likely that broadband speeds, reliability and quality will improve significantly in coming years. This may allow for the introduction of effective internet-based television services to some parts of Australia. Such services have been introduced to some overseas cities, although usually these services are limited to areas where population densities are much higher than those in most Australian cities.

40. In addition, the ability to access video or TV on-demand over the internet (possibly soon after an initial theatre or television screening) may provide consumers with a more compelling alternative to traditional television than existing DVD-hire services.

41. A further technological development in the delivery of audio-visual content is in the mobile sector. Mobile carriers are already delivering short video clips to third generation mobile handsets, while more advanced forms of mobile TV broadcasting are being trialled.

Other Wireless Media

42. Until recently, mass-media products involving both sound and vision could only be delivered by wireless technology to televisions that were essentially fixed in location. Even where wireless could be used for mobile media, such as traditional radio broadcasts, programming was scheduled and limited to audio content.

43. Developments in wireless technology including the digitisation of traditional radio and television programming, the development of mobile telephony and the development of mobile technologies for ‘on demand’ services such as internet access, has altered this landscape.

44. As noted above, developments in wireless technology have both improved the media services that can be offered through traditional modes of delivery and enabled online media to be accessed through wireless as well as fixed line platforms.

45. Wireless technologies, however, have also led to the development of new wireless media, often delivered to consumers through a stand-alone, handheld device. The simplest of these devices is a wireless-enabled personal digital assistant (PDA). The development of PDAs means that mobile e-mail devices are now standard business tools allowing, for example, complex documents to be delivered ‘as attachments’ to parties around the world in a matter of minutes. Of course with this ‘accessibility’ comes mobile advertising, including e-mail ‘spam’.

46. More sophisticated handheld devices, such as 3G mobile phones, allow the delivery of specialised media content to consumers. For example, 3G phone users can often access specialised ‘channels’ with audio visual content that is supplied ‘on demand’. While

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these devises often also provide access to online media, they provide alternative and distinct media content as well.

47. The developments in other wireless media are in their infancy. Convergence may mean that this particular mode of delivery is subsumed by other modes of delivery, such as online media, in the future. Alternatively, other wireless media may continue to develop as stand-alone delivery mode.

Media convergence

48. Clearly a number of the developments summarised above indicate that different modes of media might be ‘converging’. The digitisation of print, audio and audio-visual content and the ability to access these alternative forms of content through a single delivery device, such as a laptop computer or a 3G telephone, is likely to lead to competition between media outlets that traditionally provided separate and distinct products.

49. At the same time, convergence of content across all modes of delivery will not be uniform. Different modes of delivery and forms of delivery are likely to converge at different rates and some may not converge at all. For example, barring a major technological breakthrough, print media is unlikely to be able to deliver audio-visual content in the foreseeable future. Further, technological developments may lead to new modes of media delivery that dominate particular areas of the media.

50. Convergence also will not be uniform over products. Some media products for example are relevant for only a limited audience or geographic area. These products currently depend on highly specialised and localised delivery modes including local print media and radio. Convergence will not affect these products equally. The internet is very good at bringing together geographically-dispersed individuals with similar specialised interests. Thus online media may provide strong competition, for example, to specialist magazines. It is far from clear, however, that the online media is any better than a local newspaper or radio station at serving geographically-clustered individuals whose only common interest is local news.

51. While convergence may lead to increased competition between media companies that are traditionally tied to particular modes of delivery, it will not lead to increased competition over all activities.

52. In addition, while technological convergence seems likely to increase competition by bringing some existing media companies into competition for the first time, on balance it is unclear whether convergence will facilitate the entry of new commercially-significant media players. For example, new players may be inhibited by the loyalty of consumers to existing media brands as well as these brands’ significant content assets. Further, where new media players do develop and become significant, they may only compete with traditional media companies over some product categories. For example, Google, has quickly established itself as a key source of media content for many internet users. However, Google does not resemble a traditional media company as it does not directly ‘produce’ content for consumers. Rather, Google compiles information, or links to information, generated by other internet users including traditional media companies. As such, while Google competes vigorously with traditional media companies for a share of online advertising revenue, it could be viewed as a complement to these traditional

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companies for content delivery. Google provides a ‘portal’ to simplify consumer access to traditional media content and other content on the internet so that, in this sense, while it competes with traditional media companies in the supply of advertising space to advertisers, it does not compete in either the acquisition of content or the supply of content to end customers.

53. Factors that limit competition in some traditional media products may continue to be relevant for new media products. As an example, traditional newspaper-based classified advertising involves strong network externalities that make a dominant provider likely in any geographic region. A classified advertisement is most valuable to an advertiser if many potential customers see it. Similarly, potential customers find a source of classified advertising more valuable if it has many advertisers. Thus, both advertisers and consumers tend to cluster on a single source of classified advertising. This has resulted in dominant newspaper-based outlets for classified advertising in real estate, cars and employment in many geographic regions. While internet-based classified advertising may encompass a larger geographic region, the same type of network externalities that exist for newspaper classifieds may exist for internet classifieds. While a number of competing sites exist at present in, say, internet real estate advertising, the dual benefits to both consumers and advertisers of using a large, inclusive site, may mean that a single internet site comes to dominate this type of on-line classified advertising in the future. Further, this site may be owned or otherwise linked to a traditional media company.

Implications of technological change for media mergers

54. While Part A of this paper has summarised how technological developments have interacted with the modes of media delivery in the recent past, it is necessarily incomplete.

55. Technology for media delivery is still changing at a rapid rate. Some ‘potential threats’ in media may prove unviable or only of peripheral interest in the longer term. For example, web-logs or ‘blogs’, are sometimes touted as providing a growing alternative source of news, information and opinion to traditional media. It is far from clear, however, that blogs will be more than a passing fad. Similarly, while ‘citizen based journalism’ is sometimes proclaimed as a rival to existing news sources, with the single exception of South Korea no internet based publication that relies solely or substantially on citizen based journalism has, as yet, been successful. However, there is evidence that traditional media companies are increasingly incorporating user-generated content, particularly digital still and moving images of breaking news, into their standard content offerings.

56. Nonetheless, recent experience with technological change in media provides some important lessons for the ACCC when considering media mergers.

57. First, it would be foolish to predict exactly how technology will alter the media landscape in the next decade. This means that media mergers cannot and should not be determined on the basis of wishful thinking about technology rather than hard evidence. Where feasible, evidence about technological trends should be drawn from real experience, for example, in overseas jurisdictions. However, media mergers that clearly substantially lessen competition should not be sanctioned simply on the basis that

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possible but unproven technological developments might reduce these anticompetitive implications in the future.

58. Second, technological changes may lead to increased competition in some areas of media but decreased competition in other areas. Media merger analysis must be abreast of verified trends in technology and consider how these changes both reduce and increase any anticompetitive implications of a media merger. Where technological changes lead to the creation of new bottleneck services, merger analysis must be aware of these changes and ensure that mergers and acquisitions are not used to create anticompetitive monopolies over these services.

59. Third, as technology develops there will be a range of mergers that bring together media companies that have traditionally not competed with each other and that do not substantially lessen competition on the basis of the best evidence available at the time. These mergers should not be hindered by speculation about either potential but unproven future technological developments or changes to the media industry.

60. Fourth, technological change need not increase competition ‘across the board’ but may be either competitively neutral or even competitively harmful for certain product types or for certain geographic locations. When analysing media mergers it must be remembered that section 50 of the Act is breached if there is a substantial lessening of competition in any relevant market. Analysis of a media merger must appropriately consider, for example, geographic distinctions in competition, say, between urban and rural Australia, to ensure that there is no lessening of competition in any relevant market.

61. Finally, media merger analysis must be flexible to accommodate changing technology and competition. Media markets are rapidly changing and will most likely continue to change in the near future. Effective media merger analysis cannot be founded on inflexible historic approaches to markets but rather must consider each individual merger carefully and on its merits.

Control of content likely to become more important

62. As the number of ways of conveying media content to consumers increases, it is likely that competition concerns relating to concentration among content providers will become more important and will be an increasingly strong focus of the ACCC when assessing mergers.

63. In particular, the supply of ‘compelling’ content—that is, content that is likely to attract significant numbers of consumers to, for example, a 3G mobile service or an internet website—is limited. Premium sport and movies are two examples of compelling content.

64. The ACCC has therefore for some time been concerned about the potential for exclusive content acquisition by media companies from content suppliers to inhibit competition in emerging modes of media, particularly those using relatively new delivery platforms such as subscription television, the internet and 3G mobile services.

65. In particular, a trend is emerging for content controlled by, for example, television stations, to be distributed on the internet and 3G mobile phone networks. If access to content controlled by a particular television station was necessary for 3G mobile phone companies to compete effectively, then any agreement under which that television station exclusively supplied the content to one mobile phone company may raise

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competition issues under section 47 of the Act which prohibits exclusive dealing. This is discussed further in Attachment Two of this paper.

66. However, media mergers might also raise similar concerns, which would be dealt with under section 50 of the Act. Case study three provides examples illustrating potential competition concerns arising in markets for the acquisition of media content.

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Part B: A framework for analysing media markets

67. Merger market analysis in Australia involves four relevant characteristics: • What are the relevant products? • What is the geographic extent of the market? • What functional levels of the vertical production chain are relevant for the merger

under analysis? • What is the relevant time frame for consideration of the competitive effects of the

merger.

68. These same four market characteristics are relevant for media mergers. Considering these four characteristics provides us with a framework for analysing media market mergers.

69. The product and geographic dimensions of a market are determined by the possibilities for substitution. Thus, the appropriate product dimension of a market includes all products to which consumers would be likely to switch in order to avoid a price rise or a diminution in service quality by the merged company.2 It also includes suppliers who, without significant investment, could easily and quickly commence supplying products that are competitive with the products supplied by the merged company, if the merged company raised its prices or otherwise engaged in conduct that harmed consumers.

70. The relevant geographic dimension of a market includes all suppliers to whom customers who are located in the geographic area supplied by the merged firm could turn for a competitive alternative if the merged firm raised prices or otherwise engaged in conduct that harmed consumers. It also includes all suppliers who, while not currently providing a competitive alternative for customers in the geographic area served by the merged firm, would be likely to commence supplying this area if the merged company raised its prices or otherwise engaged in conduct that harmed consumers.

71. The functional dimension of a market involves the identification of the vertical stage of production and/or distribution relevant to the particular product and geographical area under analysis.

72. Merger analysis is forward-looking—the issue is whether a proposed merger will substantially lessen competition in the foreseeable future. The ACCC typically looks forward two to three years.

Media products

73. Media outlets have traditionally been characterised by their modes of delivery. Thus, FTA television, pay-TV, radio and print media have generally been considered to be in separate markets.

74. Technological developments have added two additional delivery modes to those listed above. The online media now represents a specific mode for the delivery of media

2. For convenience we refer to the merging parties as ‘suppliers’ here so that any anticompetitive conduct is focussed on consumers or

‘buyers’. An analogous approach to market definition applies if the merging parties are ‘buyers’ and may abuse any market power by lowering prices or otherwise engaging in conduct that harms their ‘suppliers’.

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content through the internet. Other wireless services, and in particular 3G mobile telephony, also provide an alternative media delivery mode.

75. These modes of delivery interact to provide services that encompass three broad product categories. Firms operating in one or more of these media categories supply content to viewers, purchase content from content providers, and provide space for advertisers to promote their wares. These three product classes have traditionally been viewed as separate.

76. Bringing these modes of delivery and broad product categories together, we can summarise the traditional view of media products by table one.

Table One: Traditional media products

Print media Radio FTA television

Pay television

Online media

Mobile phones

Advertising

Supply of content to consumers

Acquisition of content from content providers

77. Each of the cells in table one represents a traditional media product. Thus a merger, for example, of two FTA television stations would have had implications for three different products: the provision of FTA television advertising, the provision of FTA television content to FTA television viewers, and the provision of content to FTA television stations. Depending on the exact facts relating to a specific merger, each of these products could have been categorised as a separate market and the merger between two FTA television stations in a region of Australia might have led to a substantial lessening of competition in some or all of these three markets.

78. Analysing a specific merger might also have led to the examination of narrower product divisions than those presented in the matrix in table one. For example, for some modes of delivery there might be products that involve just sports content. Thus, a hypothetical FTA television merger might have had competitive implications, for example, relating to the acquisition of FTA sport related content, the provision of sport entertainment to FTA viewers and the provision of advertising space during the delivery of sporting content on FTA television. Similarly, a merger between two urban newspapers might have raised issues relating to news and information or to classified advertising as well as broader content. Thus the rows of table one might be further subdivided as follows.

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Table Two: Traditional media products with finer divisions

Print media Radio FTA television

Pay television

Online media

Mobile phones

Classifieds Advertising

Other

News News News News

Sports Sports Sports Sports

Supply of content to consumers

Other Other Other Other

Sports

Sports

Movies

Acquisition of content from content providers

Other Other

79. The key factor when determining whether or not these traditional product divisions represent the product dimension of markets for merger analysis under the Act is the notion of substitution. A separate market for newspaper advertising exists if advertisers who use newspapers rely on competition between newspapers to moderate the price of such advertising and if this competition is reduced, for example through a merger, these advertisers have few if any relevant economic alternatives to which they can turn to reach their prospective customers. Similarly, when considering a merger between two FTA television stations, a FTA sports content market is relevant to merger analysis if the providers of this content, including the sporting bodies and independent content providers, can only ‘play off’ competing FTA television stations against each other for the sale of this content and have few economic alternatives to turn to if competition between FTA television stations is reduced. Alternatively, when considering a merger between alternative providers of sporting content for FTA television, the relevant market for analysis will depend on whether other sources of content provide appropriate substitutes for FTA television broadcasters if the price of sporting content rises, for example, by 5–10 per cent post-merger.

80. The traditional view of media products has been changing over recent years and is likely to change further in the future, for at least three reasons. This will impinge on the markets that are relevant for merger analysis under the Act. First, any changes to cross media laws make feasible some mergers that previously would have been impossible.

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Thus mergers that involve aggregations across modes of delivery become more relevant and raise competition issues that cross delivery modes.

81. Second, technological changes and convergence mean that delivery modes are becoming more closely aligned. Thus, digitisation makes it more likely that FTA and Pay-TV compete directly with each other in some products. Developments in the internet mean that newspapers and online media directly compete for some types of advertising. Content producers now provide ‘packages’ that cross television, the internet, 3G telephony and newspapers, so that a merger affecting any two of these delivery modes may affect competition in the provision of such content.

82. Thirdly, developments in advertising such as product placement and the use of ‘viral advertising’ where advertisements are transferred via the internet and word-of-mouth before or replacing television release, are, at the margin, blurring the lines between advertising and content as well as between alternative delivery modes.

83. These changes have their greatest effect on the vertical divisions in the product matrix. Changes to the way in which different types of media content can be delivered is ‘smearing’ the distinctions between these modes so that the traditional demarcation across modes of delivery is changing. As a result, product categories are broadening. Thus, it is possible that online and newspaper classified advertising could be close substitutes and hence could be considered in the same market. Similarly news and information distributed by radio, television, newspapers and online media could be close substitutes and hence could be considered in the same market, at least in some parts of Australia.

84. These broader product divisions will be reflected in the markets relevant for media mergers. Thus when considering the merger between two newspapers, or between a newspaper owner and a major online classified advertiser, and depending on the specific facts of the merger under analysis, a relevant market may be the market for the provision and distribution of classified advertising to advertisers through print and online media in Australia. Indeed, depending on the specific merger under consideration, a market that considers only one type of classified advertising could be relevant, such as the provision and distribution of employment classified advertising to advertisers through print and/or online media in Australia.

85. At the same time, the process of convergence is far from complete and the ‘smearing’ of the distinctions between delivery modes is often patchy and restricted to particular types of content at present. Technological advances are likely to continue the process of convergence across delivery modes for some activities and indeed, at some time in the future it might be possible to consider a merger in the context of broad markets for advertising, content acquisition and content delivery to consumers that cross all modes of delivery. However, we are a long way from that time at present.

86. Technological changes, however, appear to be having only a limited effect on the horizontal divisions in the product matrix. There is little evidence to suggest, for example, that content and advertising are converging except in relatively rare situations. Similarly, there is little evidence at present that mainstream content providers are able to directly access consumers and avoid traditional media companies except for ‘fringe’ activities.

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87. In summary, the media product categorisations presented in tables one and two above represent a starting point—but only a starting point—for considering the product dimensions of relevant markets when considering the competitive implications of a media merger. The key factor for product market definition for all merger analysis is substitution and the ability of consumers, advertisers and content suppliers to substitute across different modes of delivery are altering due to technological change. Convergence is expanding the ability for substitution across modes of delivery for some types of products. As a result, traditional cross-media distinctions are likely to be less relevant for defining the product dimension of the relevant markets when considering media mergers in the future. As such, care must be taken to recognise convergence in competition where it has occurred. At the same time, the traditional product categorisations, between advertising, content acquisition and content delivery remain largely unchanged. Technological change is having little if any effect on the substitution possibilities between advertising, content acquisition and content delivery. The distinctions between the provision of advertising to advertisers, the acquisition of content from content providers and the supply of content to consumers are likely to remain relevant to most media mergers in the foreseeable future.

The geographic extent of media markets

88. The geographic dimension of markets for merger analysis is determined by the extent of potential buyer and/or seller substitution. In some situations, where relevant substitution possibilities are national in scope, a national market is relevant for merger analysis. In other situations, more localised markets are relevant.

89. Traditionally, the geographic scope of many media products has been relatively limited. In part, this reflects the traditional ‘broadcast areas’ of television and radio and the areas of circulation of newspapers.

90. Technological change and the development of new modes of delivery are clearly changing, and generally broadening, the geographic scope of some media products.

91. To continue the example from paragraph 84 above, when considering the merger between two newspapers, or between a newspaper owner and a major online classified advertiser, and depending on the specific facts of the merger under analysis, a national employment classified advertising market might be relevant.3 National online employment classified sites might provide advertisers with a relevant competitive alternative to local newspapers for classified employment advertisements depending on the ‘local penetration’ of the online advertisers, the benefits of broader geographic advertising, the prices the online sites charge and the service quality of these sites. Indeed, the ‘local’ newspapers themselves may operate associated national online classified advertising sites, further suggesting that a national market might be relevant for trade practices analysis.

92. Similarly, when considering a particular media merger, if the facts relating to that merger suggest that the relevant product dimension of the market involves international news supplied via newspapers, television and online media, then it is quite likely that the

3. Assuming that the evidence supports a product dimension constituted by employment classified advertising rather than either a broader or

narrower product market categorisation.

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relevant geographic dimension of this market would be national, probably with a significant level of imports. To the degree that substitution between newspapers, television and online media was feasible for international news then it seems likely that this substitution would be national in scope. Locally-based media in this situation would most likely be constrained from reducing the quality of their international news by the threat of consumers switching to nationally-based websites or overseas websites.

93. While the geographic scope of some media products may be broadening, this extended breadth does not apply to all products. In particular, local news, information and advertising often face a restricted set of potential media outlets, involving limited coverage on both traditional and ‘new’ media. As a simple example, coverage of local council activities in urban Australia is often limited to the local newspaper and an occasional blog or council run website. Similarly, local advertising generally remains geographically restricted. Small businesses in rural and regional areas may find little utility in being able to advertise on national websites and face a relatively restricted range of ways to send their message to local customers.

94. The geographic scope of media products varies widely. As a result, when considering a media merger, the relevant geographic scope of the markets that are relevant for competition analysis will depend critically on the merger under analysis. A merger between two large urban media players, such as a radio station and a FTA television broadcaster in Sydney, where evidence suggested a market including TV, radio, online media and newspapers, would most likely involve relatively broad geographic markets. In contrast, a merger between a local radio station and television broadcaster in a rural town is likely to involve some significantly narrower markets, possibly down to the level of the individual town or shire.

95. In summary, while technological change has tended to broaden the geographic scope of media products this does not hold for all products and all geographic locations. When analysing media mergers, the ACCC must be sensitive to the particular substitution possibilities available in geographic areas. Sometimes this will mean that broad geographic markets are relevant when considering some of the products that are affected by a particular merger. However, for particular products that are affected by a merger, narrow geographic markets may be most relevant for competition analysis, particularly in rural and regional Australia.

Functional distinctions in media markets

96. The standard functional distinctions between media products are reflected in the broad product categories in table one. Media companies are usually involved in upstream markets for the purchase of content, upstream markets for the provision of advertising space to advertisers, and downstream markets for the provision of content to end users.

97. As already noted, technological change and changes to cross media ownership laws are unlikely to significantly affect these functional distinctions.

98. Notwithstanding the above, media mergers often raise considerable debate about functional market distinctions because of the two-sided nature of media products.

99. Two-sided products arise when an intermediary acts to bring together ‘consumers’ who seek to interact with each other. Often this interaction is complementary. For example,

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financial institutions bring together borrowers and lenders. Real estate agents bring together parties who wish to sell property with parties who wish to buy property.

100. These types of complementary interactions create few new economic problems compared to traditional production processes and indeed the two-sided nature of the product really simply reflects a particular institutional arrangement. For example, a real estate agent could, in theory, buy property from sellers and then resell it to buyers, possibly adding value (such as home renovations) along the way. Such an organisational structure would then mimic many manufacturing processes where a producer purchases inputs and create a final product of value to consumers.

101. With complementary two-sided products, care must be taken to understand the nature and rationale behind the particular institutional arrangements underlying the production process. These can be complex and can raise subtle competition issues, such as in credit card markets. However, in general, merger market analysis is not significantly different in these situations.

102. Media markets involve a complementary two-sided relationship between content and consumers. Modes of delivery provide a way for content providers to reach individuals who wish to consume this content. A variety of different models for this delivery exist. These include media companies, such as television stations, providing their own content, media companies buying ‘off the shelf’ content or media companies providing ‘space’, such as an internet site, where content providers can place their product.

103. When analysing media mergers involving complementary two-sided products, the ACCC needs to fully understand the economic implications of alternative institutional arrangements that could be adopted for delivering these products. However, these are issues that are dealt with in a wide variety of other industries.

104. Two-sided products may not, however, be complementary. This is the situation with most advertising. Modes of delivery provide a conduit for advertisers to reach their potential customers. However, many potential customers may prefer not to be subjected to the advertising, viewing it at best benignly and at worst as a ‘cost’ of accessing other content .

105. Free-to-air television provides the traditional example of this form of two-sided product. FTA television stations bring advertisers and potential consumers together. However, in order to entice the potential consumers to watch the advertisements, FTA television stations provide desirable programming to consumers at no direct monetary cost.

106. Two-sided products involving advertising raise a number of different issues to standard complementary two-sided products. In particular advertising involves a negative feedback between consumers and advertisers that is not present for complementary two-sided products. While advertisers prefer more consumers who view their advertisements in addition to media content, with some exceptions, consumers prefer less advertising interspersed with their media content. This negative feedback has led to claims that reductions in competition on one side of the two-sided advertising product may be desirable. For instance, it has been suggested that a reduction in competition on one side of the relevant product can actually make participants on the other side of the product better off. A merger that reduces competition and raises the price for advertising over a

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particular mode of delivery may make consumers of content better off as there is less advertising overall.

107. While non-complementary two-sided markets raise interesting economic issues, these are unlikely to impinge on market definitions when considering media mergers. Further, while the ACCC needs to carefully analyse the competitive effects of mergers in such situations on a case-by-case basis, feedbacks are only relevant for s. 50 analysis to the degree that they prevent or exacerbate a substantial lessening of competition.

108. If a merger leads to a substantial lessening of competition, for example, in a relevant advertising market then the merger violates s. 50 of the Act. If the merging parties wish to claim that the non-complementary, two-sided nature of the media products lead to offsetting benefits, then these claimed benefits are most appropriately considered through merger authorisation, not informal merger clearance. Authorisation provides an appropriate framework for merging parties to provide credible evidence to support claims that a media merger creates an overall public benefit even though it substantially lessens competition in one or more markets. The authorisation process is outlined in Attachment One at paragraph 19.

109. In summary, when considering media mergers the starting point for the delineation of the relevant functional distinctions between markets are the traditional product distinctions between the upstream markets for the purchase of content, upstream markets for the provision of advertising space to advertisers, and downstream markets for the provision of content to end users. As already noted the product and geographical dimensions of these markets may be broad or narrow, depending on the facts of the particular merger under analysis. While there may be subtle interactions between different functional stages in the production process, and these interactions need to be understood in order to analyse the competitive implications of a media merger, these interactions are present in other non-media mergers and simply represent new applications of existing competitive analytical tools. In particular, interactions between functional stages of the media production process are unlikely to change the functional dimensions of market definition.

The timeframe for media merger analysis

110. When considering a merger, the ACCC must use the with-or-without test. Put simply, the ACCC must consider the likely future of competition if the merger occurs versus the likely state of competition if the merger does not proceed. This analysis requires the ACCC to consider both current competition in the relevant market and how this competition will develop over time.

111. When dealing with media mergers, the ACCC needs to be cognisant of the changing nature of media technology and the competitive impacts of this technology. However, as noted above, when considering technological innovation and its effect on a particular merger, the ACCC cannot engage in speculation. Rather any relevant changes to the market going forward must have a real chance of emerging before the effects on competition can be considered and factored into merger analysis.

112. Technological changes clearly impinge on both the nature of media and the time frame for analysis of the competitive effects of a media merger. However, media mergers

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cannot and should not be determined on the basis of wishful thinking about technology rather than hard evidence. Media mergers that clearly substantially lessen competition should not be sanctioned simply on the basis that possible but unproven technological developments might reduce these anticompetitive implications in the future. At the same time, media mergers that do not substantially lessen competition on the basis of the best available current evidence should not be hindered due to speculation about either unproven potential future technological developments or changes to the media industry.

Part C: Applications of the framework for media mergers

113. The framework for analysing media mergers presented above is necessarily described at a ‘high level’. In practice, media mergers will be analysed on a case-by-case basis. The relevant media markets for merger analysis will depend on the actual merger under consideration.

114. To assist the reader to understand the framework, this section provides some simple examples as to how the ACCC may consider particular markets for merger analysis. The discussion here should be considered exemplary only and is intended to highlight the types of questions that the ACCC will be addressing when considering specific media mergers.

Case study one: Advertising markets and media mergers

115. We begin by considering how media mergers may effect the provision of advertising services. As with all mergers, the key issue for market definition is substitution. Crudely speaking, the main question when considering an advertising market for merger analysis is: Which alternative media outlets would be likely to constrain a merged media company from increasing its advertising prices because advertisers consider them to be substitutable?

116. To illustrate how the analysis of substitution between advertising products can be facilitated by using the framework presented in Part C of this paper it is useful to consider a simple example. Suppose that there is a proposed merger between two newspaper publishers that currently service a particular region of Australia. Further, in order to maintain simplicity, suppose that these are the only two newspapers that service this region. To analyse the competitive effects of this merger, the ACCC needs to consider the relevant markets for competition analysis. These markets will be determined by considering the relevant product, geographic and functional dimensions of the markets. With regards to the functional dimension, our focus here is on the ‘upstream’ provision of advertising space to advertisers.

The relevant product(s)

117. When considering the relevant product dimensions of the advertising markets relevant to the merger of two newspapers, the ACCC needs to consider what substitution possibilities, if any, exist both between different types of advertising products provided by newspapers and across different modes of delivery.

118. First, consider the product-span of the relevant advertising markets. Suppose that the market evidence available to the ACCC shows that, from the perspective of newspaper

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advertisers, one type of newspaper advertisement is readily substitutable for other types of newspaper advertisement. Thus, if the price of classified advertising rose relative to display advertising, many advertisers who currently acquire classified advertising from the merging newspapers would consider the option of moving to display advertising and vice-versa. Indeed, if faced by a rise in the relative price of classified newspaper advertising, suppose that enough advertisers would actually switch to other types of newspaper advertising so that this relative price rise would not maximise profits for the merged newspapers. This type of evidence means that, from an economic perspective, there is most likely a single ‘advertising market’ that is relevant to the newspaper merger. Of course, the breadth of this market in terms of the modes of delivery would still need to be determined. This is discussed below.

119. In contrast, suppose that the ACCC’s market inquiries show that different forms of newspaper advertising are not close substitutes for each other. Thus, a rise in the relative price of classified advertising, by itself, would not lead to significant substitution to other forms of newspaper advertising. This evidence suggests that the span of the relevant product dimensions might be less than all advertising. For example, when considering the competitive effects of the merger, it might be more appropriate to consider display and classified advertising as being in two distinct and different markets.

120. Once the product-span of the relevant advertising markets is determined, the ACCC would then need to consider substitution across modes of delivery. For example, suppose that the ACCC had determined that a separate classified advertising market was relevant for the analysis of the newspaper merger. Then if enough of the advertisers who, pre-merger, buy classified advertising space in one or both of the newspapers consider online classifieds to be substitutable for newspaper classified advertising, then newspaper and online classifieds would be in the same market for analysing the merger.

121. A simple economic test (the hypothetical monopolist test) is used to assist in determining the breadth of the relevant markets. In the current example, this test would ask whether or not the substitution by advertisers from newspaper classified advertising to online classified advertising is sufficient to render unprofitable a small but significant price increase in classified advertising by the merged newspaper. If substitution is sufficient to render the newspaper price increase unprofitable then it is reasonable to conclude that online classified advertising places a significant competitive constraint on newspaper classified advertising so that, for the purpose of evaluating the competitive effects of the newspaper merger, online and newspaper classified advertising should be considered as part of a single integrated classified advertising market.

122. Assuming that no other modes of delivery are relevant for classified advertisers, then one relevant market for analysing the competitive effects of the newspaper merger would have a product dimension of classified advertising encompassing both newspapers and online media.

123. In contrast to the discussion above on classified advertising, suppose that market inquiries show that for newspaper display advertising, there are no other modes of delivery that are reasonably substitutable for newspapers. Then there would also be a relevant market for merger analysis that only involves display advertising in newspapers. These two product dimensions of relevant advertising markets are depicted by the shaded regions in Table Three. The dark shaded regions are both elements of the broader

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classified advertising market. The light shaded region reflects the separate and narrower market with a product dimension only encompassing newspaper display advertising. Again it must be reiterated that these are simply examples for illustrative purposes only and do not indicate the decisions that the ACCC would reach in any future actual merger analysis.

Table Three: The product dimension of two relevant markets (case study one)

Newspapers Radio FTA television

Pay television

Online media

Mobile phones

Classified advertising

Display advertising

Other advertising

Supply of content to consumers

Acquisition of content from content providers

124. Of course, individual idiosyncrasies will always be a factor in merger analysis. The same newspaper merger may affect different groups of advertisers who use the same type of advertisements. For example, consider display advertising in the newspapers. Some advertisers may be targeting a broad audience of readers. For these advertisers, a variety of modes of delivery, such as FTA television or radio might provide adequate substitutes to newspaper advertising. Other advertisers, however, might wish to target audiences possessing particular characteristics relating to age, income, location, interests and so on. These advertisers may find alternative media outlets to be far inferior to newspaper advertising. Broader advertising, such as on FTA television, might attract larger audiences but would result in the relevant advertisers paying for advertising which is ‘wasted’ on uninterested viewers.

125. Just because a small group of advertisers lack substitution possibilities does not mean that there is a separate market for merger analysis that only covers those advertisers. Rather the key question is whether or not the merged newspaper will be able to exploit those advertisers post-merger. If newspapers set a single pricing regime for display advertising regardless of the type of advertiser or the type of display advertisement then this suggests that a small group of non-substitutable advertisers will be ‘protected’ from competitive exploitation by the larger group of advertisers if this larger group can

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substitute to alternative modes of advertising in the face of a price rise. In contrast, if newspapers are able to target ‘captive’ advertisers and charge them a higher price than other advertisers, then this is relevant for competitive analysis of the merger.

126. Further, the test under s. 50 is that a merger would not be likely to substantially lessen competition. If a merger creates some competitive harm but this is limited or otherwise insubstantial, then the merger does not violate the Act.

127. When considering whether or not different modes of delivery are in the same advertising market for merger analysis, it is also important to recognise that different media may be complements rather than substitutes for some advertisers. An advertising campaign may be more effective if it utilises a number of different media, taking advantage of the individual characteristics of each. In particular: • different media can convey different aspects of the message advertisers wish to send

to their target audience. Television advertising might be used to convey the visual aspects of the advertisers’ product or to build brand awareness. Repeated short radio advertisements might be used to highlight, for example, that a product is discounted for a period of time. Print advertising might be used to provide more detailed information about a product; and

• some consumers access different media at different times of the day. For example, some consumers might read a newspaper or access internet news and current affairs sites in the morning before leaving for work. They might listen to the radio while commuting to work, and watch television in the evening. These consumers might watch additional television during the day on weekends. Consequently, advertisers wishing to reach their target audience at a number of times during the day (or week) might advertise on different media at different times.

128. When considering the breadth of advertising markets, the ACCC needs to consider the degree to which alternative modes of delivery provide complementary rather than substitutable advertising products.

129. When considering a media merger proposal, the ACCC will seek detailed information about the scale and nature of, and the rationale for, all advertising undertaken by advertisers who advertise with each media merger party so as to form a view about which, if any, alternative media outlets advertisers would be likely to consider to be substitutable. Merger parties seeking informal clearance should provide as much information of this type as they possess at the outset of the informal clearance process.

The geographic extent of the market(s)

130. Once the relevant product dimensions of the markets are determined, it is necessary to consider the geographic extent of these markets.

131. When considering the relevant geographic scope of the advertising markets relevant to the hypothetical merger of two newspapers, the ACCC would need to consider the scope for substitution by advertisers between providers of the relevant type of advertising that are located in different geographic locations.

132. For example, in line with the example presented in table 3 above, suppose that, when considering the merger of two newspapers in a particular region of Australia, the ACCC determines that there is a market which involves classified advertising encompassing

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both newspaper and online classified advertising. A superficially attractive conclusion in this situation is that the relevant market must be national in scope. After all, online classified advertising sites can be accessed through the internet from any location in Australia or, indeed, internationally. Doesn’t this imply that the market has a broad geographic dimension?

133. Just because a classified advertisement can be accessed through the internet on a national basis does not by itself imply that the relevant market is Australia-wide. Further analysis of both the nature of newspaper and online classified advertisements would be needed to determine the appropriate geographic dimension of the market. For example, although online classified advertisements may be accessed nationally, the likely viewers of these advertisements may be restricted to a far more limited geographic region. This is reflected in the approach adopted by many online classified advertising sites. Thus, websites focussing on car sales often distinguish inquiries by state and even by city of interest. This suggests that the owners of the website understand that a Sydney-based buyer is more likely to be interested in a Sydney-located vehicle, or one located in New South Wales, rather than a vehicle located in Darwin or Perth.

134. Further, while classified advertising websites may be accessed nationally, this does not mean that they are focussed nationally or provide a national service. For example, while some real-estate websites provide national and, indeed, international listings of houses, other websites, such as allhomes.com.au focus on specific regional areas. The ability of these focussed websites to effectively compete suggests that the relevant geographic scope of online real-estate advertising is narrower than the national level when considering a merger between two regionally co-located newspapers.

135. In summary, when considering the geographic dimension of the relevant markets for competition analysis, the ACCC will consider the geographic scope of effective substitution. If most classified advertising is aimed at buyers at a local, city or state level, then the geographic dimension of the relevant classified advertising markets will be less than national.

136. In its consideration of two recent media mergers, analysis by the ACCC has indicated that the relevant advertising markets were restricted to particular geographic regions.

137. In its assessment in September 2004 of the acquisition by Macquarie Bank Limited of the radio broadcast licences owned by DMG Regional Radio Pty Ltd (DMGRR) and RG Capital Radio Limited (RG), the ACCC identified competition concerns in regional markets comprising the Albury, Cairns, Mackay, Rockhampton and Townsville radio licence areas (defined by the Australian Communications and Media Authority). This reflected both the limited broadcast areas for the radio stations and the local nature of the relevant advertisers. Market inquiries showed that for many local radio advertisers, broader geographic advertising (for example on a radio station in a neighbouring region) was not an economic alternative to local advertising.

138. In its assessment in December 2005 of the acquisition by West Australian Newspapers Holdings Limited, owner of the Mid-West Mail, of the Mid West Times, the ACCC considered that the geographic dimension of the relevant advertising market was Geraldton and the surrounding mid-west region of Western Australia. This was the primary circulation area of the Mid-West Times and Mid-West Mail.

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139. The relevant geographic scope of the advertising markets for merger analysis may differ between urban and regional Australia and may also differ depending on the type of newspapers involved in the merger. If city-wide urban newspapers attract advertising that is broadly focussed and potentially national in scope, then these newspapers might operate in national advertising markets. If regional newspapers or restricted-region urban newspapers attract advertising that is local in focus and aimed at geographically localised groups of customers, then these newspapers may operate in local advertising markets.

Case study two: media mergers and the supply of content to consumers

140. Case study one focussed on the implications of a merger between two newspapers on the provision of advertising space to advertisers. In contrast, this second case study will focus on the provision of content to media consumers.

141. The aim of this second case study is to highlight some of the complexities that can arise when considering the product dimensions of the markets that are relevant for analysing a ‘cross media’ merger. In particular, this case study highlights how the product-span and substitution between modes of delivery may be inter-related when considering the product dimension of the relevant markets. It also highlights a number of issues that arise when considering substitution and ‘free’ media.

142. As in case study one, we will use a specific hypothetical merger to guide the discussion. Suppose that a FTA television broadcaster operating in a number of major Australian metropolitan areas wished to acquire a subscription television broadcaster that serviced those same geographical areas. A key competitive issue raised by such a merger is whether or not the merger would be likely to lead to a substantial lessening of competition in relation to the provision of television services to consumers in the relevant metropolitan areas of Australia.

143. The functional dimension for analysis in this case study is the ‘downstream’ supply of content to media consumers. To avoid repetition of issues discussed in detail in case study one, we will only consider the product dimension of the market(s) in depth in this case study.

144. First, consider whether or not the product dimensions of the relevant markets encompass both FTA television and pay TV. In particular, when considering the provision of various types of streamed audio-visual content to consumers, does FTA television compete with pay TV and do either or both of these modes compete with other modes for delivery of media content to consumers? To answer this question the ACCC would need to consider the degree of substitution between different modes of delivery for media.

145. The standard economic approach to determining the level of substitutability between two different products is to consider the degree of consumer switching that occurs when there is a price rise in one of the products. However, such an approach appears to raise concerns when considering modes of media delivery such as FTA television and radio where no explicit monetary price is charged to consumers.

146. These concerns are unfounded for two reasons. First, when comparing two modes of media delivery, so long as one of these modes charges a monetary price to consumers, it

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is possible to consider the reaction of consumers to a change in the relative price between the two modes. For example, suppose that there is a rise in the price of pay TV services. Such a price rise makes pay TV relatively more expensive than FTA television. If, as a result of this change in relative prices a significant number of consumers change their consumption from pay TV to FTA television, for example by cancelling their pay TV subscriptions and viewing more FTA television, then this is strong evidence that pay TV and FTA television are substitutes and are likely to be in the same market for merger analysis. The same holds if there is significant movement of viewers from FTA television to pay TV in response to a decrease in the subscription price for pay TV services.

147. Second, a merger can result in consumer detriment in ways other than simply an increase in the price of some products. While there is no explicit monetary price charged to viewers of FTA television, a merger can lead to consumer detriment by a reduction in the quality of FTA television services. For example, a reduction in quality may involve changing the product mix of programs or increasing the level of advertising during programming. Thus, consideration of consumer reactions, for example, to an increase in advertising levels on FTA television will assist in determining whether or not FTA television and pay TV are part of the same market for merger analysis.

148. There are some subtleties of market analysis that go beyond the scope of this paper. For example, markets can be asymmetric. FTA television may provide a competitive constraint on pay TV but not vice versa. This is most likely to arise where there is an asymmetry in the relevant service provision, for example, where the number of pay TV subscribers is low relative to the number of FTA television viewers. In these circumstances, when considering a merger, for example, between two providers of pay TV services a broad television product dimension may be most relevant for merger analysis because FTA television places a competitive constraint on pay TV. However, at the same time, when considering a merger between two FTA television broadcasters, a product dimension for market analysis that is restricted to just FTA television and omits pay TV may be relevant due to the lack of competitive constraint placed on FTA television by pay TV.

149. Issues in merger market analysis, such as asymmetric competitive constraints, arise in a variety of industries and are not unique to media mergers. The ACCC has considerable experience in dealing with the subtleties of merger market analysis in order to ensure that the analysis captures the real competitive constraints that exist in the relevant industry.

150. For convenience, in the context of this exemplary case study, suppose that the market evidence available to the ACCC shows that the relevant product dimension of the markets for analysing a merger between a FTA television broadcaster and a subscription television broadcaster includes at least both of FTA television and pay TV. The ACCC would also need to consider whether any other modes of media delivery were included in the product dimension of the relevant markets. For example, does either radio or online audio-visual content provide a relevant competitive alternative to FTA and subscription television from the perspective of consumers?

151. In terms of the basic product matrix presented in table one, it is possible that different modes of delivery for media might provide different substitution possibilities for

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consumers depending on the exact nature of the broadcast content. As such, it is not possible to determine the relevant breadth of mode of the product markets for merger analysis without at the same time considering the span of products.

152. In terms of product breadth, at the broadest level, both FTA television and pay TV provide streamed audio-visual content to consumers. Thus, at its broadest, the relevant product dimension when considering the content provision markets relevant to the hypothetical merger of a FTA television broadcaster and a subscription television broadcaster would involve streamed audio-visual content.

153. It is far from clear, however, that there is a single amorphous audio-visual product. When considering the product dimensions of the markets relevant for competitive analysis of the hypothetical proposed merger, narrower markets relating to particular types of content might be appropriate. Again, the key criteria used when determining the appropriate breadth of the product dimension will be substitution.

154. Consider the provision of news, information and current affairs on pay TV. If, post-merger, the pay TV broadcaster raised the price of subscription channels that specialise in news, information and current affairs, what alternative products would be substitutes for viewers of these channels? If, as a result of the price rise, a significant number of viewers would simply alter their viewing habits, consuming more variety, movies, sport or other content from the pay TV provider, then this suggests that the relevant product dimension may be broader than simply news, information and current affairs. In contrast, if, in response to the price rise, viewers either continued to consume news, information and current affairs content from the pay TV supplier or reacted by substituting away from watching pay TV news to consuming news and information services from FTA television, then this suggests that the relevant product dimension might be limited to news, information and current affairs.

155. Clearly, in order to determine the product span of the relevant content markets for media merger analysis, the ACCC will seek extensive and detailed information about consumers’ preferences and patterns of behaviour when consuming media. This information will assist the ACCC to form a view about whether or not enough consumers are likely to consider different types of media content to be substitutable such as to warrant including them in the same market.

156. Suppose that, for the purpose of considering the hypothetical merger between a FTA television broadcaster and a subscription television broadcaster, market evidence available to the ACCC shows that there are separate markets for merger analysis delineated by the type of content. In particular, the product dimension of one market is limited to news, information and current affairs while the product dimension of one other market is limited to sports content. Further, suppose that both of these markets cover at least FTA television and pay TV. It is necessary to determine whether or not either market includes other modes of delivery.

157. To determine the degree of substitution, consider news, information and current affairs. If the ‘price’ of accessing news, information and current affairs on both FTA television and pay TV were to increase by a small but significant amount, what would be the reaction of consumers? Note that while the price rise for pay TV might be direct, through increased subscription charges for relevant channels, the price increase for FTA

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television might be indirect, for example, through a lowering of quality or an increase in advertising time.

158. If, as a result of such a price rise, many consumers altered their media consumption so that they relied less on television and more on other media modes, such as newspapers, radio and online media, then this suggests that the product modes of delivery relevant to the markets for merger analysis are broader than simply FTA and subscription television. However, this conclusion depends on the degree of substitution. If the degree of substitution is enough to ensure that other modes of media delivery place a real competitive constraint on both FTA and subscription television broadcasters for news, information and current affairs, then a broad modal dimension is relevant for merger market analysis. In contrast, if there is only limited substitution so that the competitive constraint placed on television broadcasters for news, information and current affairs content supply to consumers is weak, then a narrow modal dimension, limited to FTA and subscription television is most likely appropriate for merger market analysis.

159. Table four presents an example of the type of products that may be relevant for the analysis of a hypothetical merger between a FTA television broadcaster and a subscription television broadcaster. The product dimension of one market involves news, information and current affairs over a variety of modes of delivery including newspapers, radio, and online media but not including other wireless media such as mobile phones. This is represented by the dark shaded area in table four. The product dimension of the other market illustrated in table 4 is sporting content delivered only via FTA television and pay TV. This second market would be relevant if there was limited substitution by consumers between television and other modes of media for the delivery of sports content. This is represented by the light shaded area in table four. Again, it must be stressed that this table is illustrative only and in no way provides any guidance about the actual markets that would be relevant to a media merger in the future. Rather, it simply illustrates the nature of the analysis that the ACCC would undertake when considering an actual media merger.

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Table Four: The product dimension of two relevant markets (case study two)

Newspapers Radio FTA television

Pay television

Online media

Mobile phones

Advertising

Supply of news, information and current affairs to consumers

Supply of sports content to consumers

Supply of other content to consumers

Acquisition of content from content providers

160. The type of analysis that is illustrated in table four depends on the actual nature of substitution between different media products. It will depend on the exact nature of the merger being considered by the ACCC, including the geographic scope of the merger and the modes of delivery involved in the merger.

Case study three: media mergers and the acquisition of content from content suppliers

161. As discussed at paragraph 62, the ACCC has for some time been concerned about the potential for exclusive content acquisition by media companies from content suppliers to inhibit competition in emerging modes of media, particularly those using relatively new delivery platforms such as subscription television, the internet and 3G mobile services.

162. For example, a merger between the television station and a mobile phone company may raise competition issues if it resulted in the television station’s content being exclusively supplied to its just-acquired mobile phone operation where it was not previously possible for the television station and the mobile phone company to enter an exclusive agreement because of a market impediment (which the merger removed).

163. Similarly, a merger between, for example, a supplier of premium film content and a television station may raise competition concerns if it resulted in significant premium film content not being available to other television stations (again, subject to the caveat that some market impediment previously prevented the television station and the film content supplier entering an exclusive agreement).

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164. In April 2003, the European Commission approved the merger of Italy’s two pay television operators (giving the merged company a near-monopoly). The merger was approved subject to undertakings to address competition concerns arising from exclusive content rights held by the merged firm. Among other things, the parties undertook to: • waive virtually all exclusive rights to premium soccer content and premium movie

content; • waive virtually all hold-back rights to premium soccer and premium movie content

(this allowed competing pay TV operators to, for example, show premium soccer games ‘head-to-head’ with the merged company); and

• restrict its acquisition of premium football content to two-year contracts and its acquisition of premium movies to three-year contracts.

165. The EC sought these undertakings to ensure that new pay TV operators could emerge who could competitively constrain the merged company. The EC considered that access to premium football and movies was indispensable for new pay TV operators, as premium content drove subscriptions to pay-TV.4

166. Similarly, a merger between metropolitan radio stations might raise competition concerns if the radio stations supply programs to other radio stations, particularly in regional and rural areas. Such a merger might raise competition concerns in markets for the acquisition of content if there are few other alternatives for acquiring radio stations to turn to if the merged radio company raises its prices by a small but significant amount (for example, 5–10 per cent). These competition concerns would be in addition to any possible concerns arising from the impact of the merger on competition in relevant advertising markets and markets for the supply of content for consumers.

167. Depending on the facts of the matter, the possible product dimension of the relevant market might be the supply of radio content or the supply of particular types of radio content—for example, news, talkback or music programs. It is unlikely that radio stations could substitute television, print or other types of media content for radio content.

168. The geographic dimension of the relevant market might be national if the facts of the case suggested that acquiring radio stations could switch to alternative suppliers of content located anywhere in Australia. Alternatively, geographic markets might be, for example, state-based if acquiring radio stations strongly preferred to acquire talkback shows emanating from their state capital.

169. It is instructive to note that the functional markets in which content-acquiring radio stations compete may have quite different geographic dimensions. For example, the advertising and supply-of-content-to-consumers markets in which they compete might be localised (particularly for rural and regional radio stations), while the content-acquisition market might be national.

4. Media release, IP/03/478, European Commission, Brussels, 2 April 2003, Commission clears merger between Stream and Telepiù subject

to conditions.

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Part D: Assessing the impact on competition of media mergers

170. Broadly, merger analysis aims to determine whether existing or potential constraints in the relevant markets would be likely to prevent the merged firm from exercising market power. Market power may be exercised unilaterally by the merged company or by market participants in a co-ordinated manner. • Unilateral effects arise, where, as a result of the merger, competition between the

products of the merging firms is eliminated and the merged company may unilaterally exercise market power, for instance, by profitably raising the price of one or both merging parties’ products, thus harming consumers.

• Co-ordinated effects arise where, under certain market conditions, the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices. The main issue here is not the market power of the merging parties resulting from the merger, but instead whether the merger will create or strengthen certain market conditions which allow firms in the market (not only the merged entity) to successfully coordinate their actions to the disadvantage of consumers (or customers).

171. The analysis of market concentration—that is, the number and size of participants in the market pre and post-merger—assists in determining whether existing companies in the market would be likely to constrain the exercise of market power post merger. For example, increases in market concentration increase the potential for firms to tacitly collude (for example, by firm A responding to a price rise by firm B by raising its prices). As market concentration increases, the awareness of firms of their level of strategic interdependence increases, as does their ability to act profitably on this increased interdependence. However, the ability of firms to tacitly collude is also affected by other merger factors—for example, tacit collusion may be undermined by an existing maverick competitor or the entry of new competitors into the market. Increases in market concentration are a necessary but not sufficient condition for tacit collusion to arise.

172. The analysis of the height of barriers to entry and the potential for import competition assists in determining whether the threat of new supply of competing products (locally or from overseas) would be likely to constrain the exercise of market power post-merger. Potential barriers to entry in media markets might include: • network effects. For example, in classified advertising markets, advertisers are likely

to be attracted to media outlets already displaying a significant amount of classified advertising, as consumers are also likely to be attracted to these outlets. Consequently, there is likely to be a strong tendency for a dominant classified advertsing outlet to emerge. New entrants would be likely to find it difficult to attract advertisers away from this outlet, as any advertisers who did shift would forgo the network benefits offered by the dominant outlet;

• regulatory barriers. For example, the number of FTA television licences is limited; • brand loyalty. Consumers may be reluctant to switch from media outlets which have a

longstanding reputation for providing, for example, accurate and topical news and current affairs; and

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• access to content. New media outlets may not be able to attract significant numbers of consumers unless they have access to compelling content.

173. As regards imports, it seems unlikely that advertisers would consider overseas media to be substitutes for domestic media. Similarly, traditionally imports have been insignificant in markets for the supply of content to consumers. However, the rise of internet now provides a simple means for domestic consumers to access overseas media, although consumers largely may remain loyal to local media outlets (a possible exception is for international news). In contrast, imports of content, particularly television content from the United States and the United Kingdom, have been significant for a long period of time, and are likely to remain so into the foreseeable future.

174. Countervailing power exists where a supplier (buyer) faces a buyer (supplier) with market power or which could make a credible threat to bypass it (for example, by vertical integration). The existence of countervailing power reduces the ability of a merged firm to exercise market power.

175. Countervailing power is primarily relevant to acquisition-of-content markets. For example, in the long term, a supplier of television content might conclude that supplying content direct to consumers over the internet was a viable alternative to supplying through local television stations, which would reduce any ability of television stations to exercise market power.

176. An acquisition is more likely to raise competition concerns where the target is a vigorous and effective competitor of the acquirer. A vigorous and effective competitor is a firm which has a significant effect on the level of competition in a market because, for example, it has a history of operating as a maverick possibly by leading price reductions, promoting product innovation or generally acting in a manner likely to undermine any potential for co-ordinated conduct in the market.

177. Vertical integration affects merger analysis in several ways. In particular, vertical mergers (that is, between companies operating at different functional levels of a market) may raise significant competition concerns relating to the potential for the upstream operations of a firm to engage in strategies that limit the ability of its competitors in downstream markets to compete.

178. For example, a merger between a content-supplier and a mobile phone company could raise competition issues if this resulted in other mobile phone companies losing access to compelling content (where, for some reason, it was not possible for the content provider to exclusively supply content to the mobile phone company pre-merger).

179. Vertical integration may also affect the likely competitive impact of a horizontal merger. For example, a merger between a television station (which self-produced content) and a mobile phone company might raise concerns if it resulted in other mobile phone companies losing access to compelling content.

180. The dynamic characteristics of a market, including growth, innovation and product differentiation, can influence the likelihood of a merged company exercising market power. For example, it is likely to be more difficult for merged companies to exercise market power in markets that are growing quickly or which are characterised by rapid product innovation. The dynamic characteristics of media markets are discussed in Part B of this paper.

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181. The analysis of the availability of substitutes is mostly relevant to market definition. Market definition is discussed in Part C and D of this paper.

182. Finally, the assessment of whether the merged company would be likely to be able to significantly and sustainably increase prices or profit margins is, in effect, the reaching of a conclusion about whether the proposed merger would be likely to substantially lessen competition, taking into account the other merger factors.

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ATTACHMENT ONE

Mergers and acquisitions, the ACCC and the Competition and Consumer Act 20105

Section 50

1. Section 50 of the Competition and Consumer Act 2010 (the Act) prohibits acquisitions of shares or assets that would have the effect, or be likely to have the effect, of substantially lessening competition in a substantial market in a state, territory or region of Australia.

2. Section 50(3) specifies the following non-exhaustive list of matters—the so-called ‘merger factors’—to be taken into account in determining whether an acquisition would be likely to substantially lessen competition: • the actual and potential level of import competition in the market; • the height of barriers to entry to the market; • the level of concentration in the market; • the degree of countervailing power in the market; • the likelihood that the acquisition would result in the acquirer being able to

significantly and sustainably increase prices or profit margins; • the extent to which substitutes are available in the market or are likely to be available

in the market; • the dynamic characteristics of the market, including growth, innovation and product

differentiation; • the likelihood that the acquisition would result in the removal from the market of a

vigorous and effective competitor; • the nature and extent of vertical integration in the market.

3. These ‘merger factors’, particularly as they might apply to cross-media mergers, are discussed below.

The role of the ACCC

4. If the ACCC considers that an acquisition contravenes s. 50 of the the Act and the parties do not agree to modify or abandon the acquisition, the ACCC can apply to the Federal Court for an injunction, divestiture or penalties. Only the ACCC can apply for an injunction and/or penalties in relation to merger setting aside the acquisition in certain cases). Any person suffering loss or damage as a result of a merger which breaches s. 50 can apply for damages.

5. The ACCC investigates all mergers it becomes aware of that have the potential to raise competition concerns. In most cases, merger parties seek an informal clearance from the ACCC before proceeding with a proposed merger or acquisition. In some cases, the

5 Formerly the Trade Practices Act 1974

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ACCC becomes aware of a merger proposal (or completed merger) through the media, from complaints or via advice from other regulatory agencies.

Informal clearance

6. Over time, a practice has developed for parties contemplating a merger that might raise competition concerns to ask the ACCC whether it considers a proposal would not likely contravene s. 50 so it would seek an injunction preventing the proposed merger from proceeding. This has become known as seeking informal clearance from the ACCC.

7. While the ACCC only provides a final view on a proposed merger once it is public, the ACCC considers confidential requests for informal clearance. However, it will only provide a preliminary view on the proposed merger to the parties. In some cases, the ACCC will not be able to form a view on a proposed merger before it becomes public. Confidential reviews are usually able to be completed within three to four weeks.

8. As noted above, the ACCC will only provide a final view once a proposed merger or acquisition is public and the ACCC has had the opportunity to consult interested parties—that is, competitors, customers, suppliers, relevant government agencies and other relevant bodies. Even then, the ACCC will always reserve the right to reconsider the proposed merger if it becomes aware that any information upon which it has based its view is in any way incorrect or incomplete.

9. The ACCC’s final view in a public matter is made public on its website. For significant mergers, the ACCC issues a press release. The ACCC issues a Public Competition Assessment (PCA) providing reasons for its decision when: a merger is rejected; a merger is subject to enforceable undertakings; the merger parties seek such disclosure; and/or a merger is cleared but raises important issues that the ACCC considers should be made public. PCAs are available on the ACCC’s website. In all other cases, an outline of the ACCC’s reasoning is placed on the Mergers Public Register accessible on the ACCC’s website.

10. A statement by the ACCC that it will not intervene (that is, seek an injunction) in a proposed merger does not provide merger parties with formal immunity from legal action under section 50. However, in practice, it is extremely rare for a third party to take legal action under section 50 to undo a merger or acquisition that the ACCC did not oppose.

Public merger review

11. After conducting an initial assessment of a public request for informal clearance, the ACCC typically commences market inquiries with interested parties.

12. In some cases the ACCC will determine that only limited market inquiries (if any) are necessary to form a view on the proposed merger. Such reviews can usually be completed within a few weeks.

13. In other cases, the ACCC conducts more extensive market inquiries before determining whether it will oppose a proposed acquisition. If, after assessing the information received, the ACCC is satisfied that the proposed merger does not raise competition concerns, informal clearance is typically granted. This process generally takes within six to eight weeks.

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14. However, if any competition concerns remain after market inquiries are completed, the ACCC may release a Statement of Issues. The content of Statements of Issues varies with the circumstances. Some indicate the ACCC’s preliminary view on a proposed merger. Others seek further submissions on outstanding competition concerns.

15. Where the ACCC releases a Statement of Issues (and/or if there are discussions with merger parties on resolving competition concerns through a section 87B undertaking—see paragraph 18), the ACCC will endeavour to complete its assessment within twelve weeks of the beginning of the investigation.

16. Once it has completed its merger review, the ACCC advises the merger parties about whether it intends to intervene—that is, oppose a matter.

17. If the ACCC advises the parties that it will intervene if they attempt to proceed with the merger, the merger parties may choose to: modify or withdraw the proposal; offer undertakings to the ACCC pursuant to section 87B of the Act sufficient to remedy the anticompetitive effects of the acquisition; apply for authorisation under section 88(9) of the Act or, proceed with the transaction if they are confident that they will be able to successfully defend legal proceedings brought by the ACCC.

Undertakings

18. Section 87B undertakings are enforceable in the Federal Court of Australia.6 Generally, parties undertake to restructure the merger proposal, by divesting parts of the business, so as to address the ACCC’s competition concerns. However, occasionally the ACCC might accept a behavioural undertaking7 from merger parties to supplement a divestiture undertaking.

Authorisation

19. Authorisation provides immunity for merger parties from legal action under section 50 commenced by any person.

20. The ACCC shall not grant authorisation unless it is satisfied in all the circumstances that the proposed merger would be likely to result in such a benefit to the public that the acquisition should be allowed to proceed.8

21. The ACCC has 30 days to consider a merger authorisation application, although this may be extended to 45 days for complex matters.9 It may also be extended if the ACCC requests further information from the applicant10 or with the agreement of the applicant.11

6. If a section 87B undertaking is breached, the ACCC may seek orders from the Federal Court directing

compliance with the undertaking, the giving up of any financial benefit gained from the breach, compensation for any other loss or damage as a result of the breach, or any other appropriate orders.

7. A behavioural undertaking is one that requires the merger parties to do certain acts, possibly in accordance with a set of rules and conditions, or not do certain acts.

8. Section 90(9). 9. Subsections 90(11) and (11A). 10. Section 90(11)(b). 11. Section 90(12).

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22. ACCC authorisation decisions may be reviewed by the Australian Competition Tribunal on application by an interested party. Authorisation may be granted subject to, in particular, section 87B undertakings provided by the applicant.

Merger assessment

23. Broadly, the assessment of any merger involves: • defining the relevant markets; and • determining whether the proposed merger or acquisition is likely to substantially

lessen competition in those markets having regard to the merger factors listed at paragraph 2.

24. The potential for competition concerns to arise is typically substantially reduced if the merger parties’ businesses operate in different markets (although, for example, competition concerns might still arise from a merger of two companies at different functional levels of the same product and geographic market—that is, a vertical merger), or a merger in different markets altogether (a conglomerate merger) if this enables the merged entity to leverage its market power in one market to lessen competition in another market.

Taking into account the reasonably foreseeable

25. Section 50 of the Act specifically requires the ACCC to consider the dynamic characteristics of the market. In practice, this requires the ACCC to take into account reasonably foreseeable market developments. This includes developments—particularly, for media markets, technological and potential regulatory developments—that might affect market definition, barriers to entry and so on.

26. Consistent with International Competition Network guidelines, the ACCC tends to look forward around two years, but the individual circumstances of a merger or acquisition might extend or reduce this period.

The counterfactual

27. Section 50 prohibits mergers which are likely to substantially lessen competition in the (reasonably foreseeable) future. Consequently, the analysis of the impact on competition of a proposed merger must start with an assessment of the likely state of competition in the relevant markets in the future if the merger does not proceed. This is known as the ‘counterfactual’ and provides the benchmark for determining whether the proposed merger is likely to substantially lessen competition if it does proceed.

28. In practice, a significant issue for the counterfactual is whether the merger parties will continue as separate competitors if the merger does not proceed. In most cases, the available evidence typically suggests that they will continue as separate competitors. However, in other cases, it will be clear that the owners of a company intend to sell it, possibly via a tender process. In these cases, the counterfactual to a company buying the target is likely to be another company buying it.

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29. In conducting a merger assessment, there may be a number of different scenarios for the future state of the relevant markets. In these cases, the ACCC will take account of the scenario that is more likely than not to occur, and disregard the others. In the event that there is more than one scenario and no one scenario is more likely than the others to occur, the ACCC need only consider or satisfy itself that there is a real chance of a substantial lessening of competition among the future possible scenarios.

Defining the market

30. When assessing a merger, the ACCC seeks to define the appropriate product, geographic and functional markets.

31. Broadly, the appropriate product market includes all suppliers of products to whom consumers would be likely to switch so as to avoid a price rise by the merged company. It also includes suppliers who, without significant investment, could commence supplying the product supplied by the merged company if the merged company raised its prices.

32. The relevant geographic market includes all suppliers who currently supply the area supplied by the merged company or who would be likely to commence supplying this area if the merged company raised its prices.

33. The CCA also expressly defines a market to include a market in a region of Australia.12This makes it clear that proposed cross-media mergers in regional Australia could contravene section 50 of the Act.

34. The definition of the relevant functional market involves the identification of the vertical stage of production and/or distribution relevant to the proposed merger.

35. The process of market definition can be viewed as establishing the smallest area of product, functional and geographic space within which a hypothetical current and future profit maximising monopolist would impose a small but significant and non-transitory increase in price (SSNIP) above the level that would prevail absent the merger. More generally, the market can be defined as the smallest area over which a hypothetical monopolist (or monopsonist) could exercise a significant degree of market power. This would be possible only if all sources and potential sources of close substitutes for the merged firm’s products have been included in the definition of the market.

36. Market definitions are specific to the merger being considered, and different merger proposals, even within the same industry, may not give rise to the same market definitions. In particular: • markets depend critically on the products may be asymmetric. For example, some

consumers who source news from the internet may also source news from newspapers; however, the opposite may not necessarily be true. While both media may provide similar ‘content’ in that they can provide the consumer with text news articles, there may be other factors affecting the consumer’s choice of media such as convenience, location and ease of access to the internet; and

12. Section 50(6) of the Act.

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• markets evolve over a period of time. Media market definitions may currently, or in the near future, be evolving more quickly than most markets given that the media is likely to be in the early stages of a period of substantial change in technology and consumer tastes, and in the future may experience significant regulatory changes.

37. It therefore cannot be assumed that media market definitions used in earlier ACCC merger assessments can be applied unchanged to future ACCC merger assessments, including of cross-media mergers.

Merger analysis and the merger factors

38. Broadly, merger analysis aims to determine whether existing or potential constraints in the relevant markets would be likely to prevent the merged firm from exercising market power. Market power may be exercised unilaterally by the merged company or by market participants in a co-ordinated manner. • Unilateral effects arise, where, as a result of the merger, competition between the

products of the merging firms is eliminated and the merged company may unilaterally exercise market power, for instance, by profitably raising the price of one or both merging parties’ products, thus harming consumers.13

• Co-ordinated effects arise where, under certain market conditions, the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices. The main issue here is not the market power of the merging parties resulting from the merger, but, instead, whether the merger will create or strengthen certain market conditions which allow firms in the market (not only the merged entity) to successfully coordinate their actions to the disadvantage of consumers (or customers).14

39. The analysis of market concentration—that is, the number and size of participants in the market pre and post-merger—assists in determining whether existing companies in the market would be likely to constrain the exercise of market power post merger.

40. The analysis of the height of barriers to entry and the potential for import competition assists in determining whether the threat of new supply of competing products (locally or from overseas) would be likely to constrain the exercise of market power post-merger.

41. Countervailing power exists where a supplier (buyer) faces a buyer (supplier) with market power or which could make a credible threat to bypass it (for example, by vertical integration). The existence of countervailing power reduces the ability of a merged firm to exercise market power.

42. A vigorous and effective competitor is a firm which has a significant effect on the level of competition in market because, for example, it has a history of operating as a maverick possibly by leading price reductions, promoting product innovation or generally acting in a manner likely to undermine any potential for co-ordinated conduct in the market.

13. ICN Merger Guidelines Workbook, p11. 14. ICN Merger Guidelines Workbook, p11.

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43. Vertical integration affects merger analysis in several ways. In particular, vertical mergers (that is, between companies operating at different functional levels of a market) may give rise to significant competition issues such as the exercise of foreclosure strategies by the upstream entity over competitors to its downstream operations. Vertical integration may also affect the likely competitive impact of a horizontal merger.

44. The dynamic characteristics of a market, including growth, innovation and product differentiation, can influence the likelihood of a merged company exercising market power. For example, it is likely to be more difficult for merged companies to exercise market power in markets that are growing quickly or which are characterised by rapid product innovation.

45. The analysis of the availability of substitutes is mostly relevant to market definition.

46. Finally, the assessment of whether the merged company would be likely to be able to significantly and sustainably increase prices or profit margins is, in effect, the reaching of a conclusion about whether the proposed merger would be likely to substantially lessen competition, taking into account the other merger factors.

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ATTACHMENT TWO

Exclusive content acquisition, access to carriage services and competition in pay TV and infrastructure markets

47. The ACCC has for some time been concerned about the potential for exclusive content acquisition to inhibit competition in emerging modes of media, particularly those using relatively new delivery platforms such as subscription television, the internet and 3G mobile services.

48. To give an example of the sort of issues raised by the exclusive acquisition of premium content by a particular media organization, consider the acquisition, for example, by a pay TV operator of the exclusive rights to televise several popular spectator sports. By gaining these exclusive rights, the relevant pay television operator may have the ability to foreclose competition in pay TV to the degree that any other pay TV operator would need access to at least some of this sports content to provide a viable competitive alternative for viewers.

49. In practice, the acquisition of exclusive premium content rights, such as the exclusive rights to broadcast a range of popular sporting events, would be likely to take place over a period of time as the rights come up for sale. The sequential acquisition of exclusive premium broadcasting content may overtime lead to a media company collecting a portfolio of exclusive rights that last for a sufficiently-long period of time to raise competition concerns.

50. The acquisition of exclusive content has important implications for the development of competition involving new modes of delivery and media platforms, such as online media delivered through the internet. The internet can be used to deliver multiple communications services including online media (such as television or radio channels, on-demand movies or sport), telephony and international website access. Competition, for example, in the provision of access to consumers to the internet, may be stymied if companies, such as a particular Internet Service Provider (ISP) and a particular online media company with significant exclusive content, reach a mutually beneficial arrangement that discriminates against other companies. For example, if the online media company provides preferential pricing to customers who subscribe to a particular ISP, then other ISPs may find themselves at a significant competitive disadvantage in attracting subscribers. Alternatively, if an ISP provides a discriminatory deal for a particular online media company, such as not charging its subscribers for downloads from the sites associated with that online media company, then other online media companies may find themselves competitively disadvantaged in attempting to compete for consumers.

51. Clearly, arrangements such as discriminatory pricing, the bundling of products or the tying of products such as ISP services and online media, are more likely to raise competition concerns where either (a) one or both of the companies involved in the arrangements has a significant degree of market power in one of the products relevant to the arrangement; or (b) where the arrangement itself is likely to lead to one or both of the companies involved in the arrangement achieving a significant degree of market power through the operation of the arrangement. Thus discriminatory pricing between an

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ISP and a particular online media company is more likely to raise competition concerns if either (a) the ISP, or the online media company, or both have a significant degree of market power in their particular parts of the service delivery chain relating to the products being priced on a discriminatory basis; or (b) the companies are so placed that the discriminatory pricing is likely to lead to the ISP, the online media company, or both gaining a significant degree of market power and, as such, reducing competition.

52. Notwithstanding the above, exclusive agreements for the supply of popular sporting and other content are already common in both the free-to-air and pay-TV sectors. Such agreements are not necessarily anti-competitive.

53. Section 47 of the CCA prohibits a range of conduct collectively known as exclusive dealing. In particular, section 47 would prohibit, for example, a business acquiring sporting content on condition that the acquirer does not supply it to other businesses, if the arrangement substantially lessens competition.

54. Where section 47 does not apply, section 45 prohibits companies from entering into any arrangements that result in a substantial lessening of competition. So, a telecommunications or media company exclusively acquiring certain premium content might—at least potentially—breach the Act.

55. Similarly, in regard to the control of communications networks and its effect on downstream media markets, the ACCC has regulatory powers under Parts XIB and XIC of the Act to address telecommunications bottlenecks for the carriage of content services.

56. In applying those regulatory powers to the networks of the future, the ACCC’s objectives under the Act are: • to encourage efficient investment in (and use of) infrastructure—and that includes

taking into account investment incentives and the degree of risk; • to promote competition—for example, the ACCC would be concerned if control of

the telecommunications pipes could be used to exert control over downstream media markets; and

• to ensure that Australians continue to have any-to-any connectivity in communication services between each other.

57. Regulation is and must remain targeted at the key bottlenecks. The ACCC is currently undertaking a broad-ranging review of the regulation of fixed network services, including consideration of the alternative technologies mentioned above—notably wireless, cable and fibre. The review will assess if and where it is possible to wind back existing regulation, where bottlenecks remain, and where they may be created by new network infrastructure.