Bronwyn led off: she was convinced that the Commerce Commission was wrong to decline the merger (all the details of the Commission process are here).
The Commission's view was that the merged entity would leverage Sky's market power in content into the market for broadband supply, foreclosing rivals' ability to compete. I could see the logic, though as in many of these cases you do wonder whether the up-front consumer benefits (eg from deep bundle discounting) are worth more than the costs of any later potential squeeze on competition. I'm not wholly convinced, for example, that the ACCC was right to stop the Aussie supermarkets giving their shoppers big discounts on petrol.
Bronwyn argued first of all that the Commission's foreclosure concerns did not take into account that Sky and Vodafone had already been bundling since 2009 on a contractual basis, yet foreclosure hadn't happened. I'm not sure this was a killer argument, as I'd wonder whether the contractually available bundles were earth-shatteringly attractive, either to consumers or to internet service providers (ISPs). For example, for some of the time since 2009 these contracts came with restrictive 'key commitments' for the ISPs - restrictive enough, in the Commission's view, to have likely breached s27 of the Commerce Act.
But Bronwyn followed up with other arguments. She argued that the markets had been wrongly defined as markets for single products (content and broadband) when the right market was a market for bundles. And if you looked at bundles, she said, then there are different ways of approaching the competition implications of bundling, depending on the types of bundling. In models that best describe what has been on offer in New Zealand, foreclosure looked either unlikely or impossible.
Better still, she actually modelled, using a simulation, how some of these bundle markets would play out, and demonstrated that far from being an uncompetitive leveraging to foreclosure, total welfare could well be greater with bundling than without. I really liked this: we get too little simulation and too little econometric analysis in merger (and other regulatory) decisions, even though the availability of data and the quality of the modelling tools are getting better all the time.
Sarah's legal perspective was less on the merger itself (where Russell McVeagh had represented Spark in arguing against a clearance) and more about what it implied for merger policy more generally.
She had three big points. One was that the legal test for a "likely" post-merger substantial lessening of competition (SLC) - a legacy of the Woolworths/Warehouse cases - is too low. As she said, "In practice it means, “is there sufficient evidence to support a prima facie case of a risk that a substantial lessening of competition might arise”?" And it certainly came as a surprise to the non-lawyers in the room that "likely" does not mean "more likely than not". She preferred something more like the Aussie Metcash test, which talks about a "commercially relevant or meaningful" SLC rather than a theoretical but remote possibility.
The second was that binary clearances/declines are blunt instruments and that we would be better off with a system that allowed for approvals subject to behavioural undertakings (which the Commission currently can't accept, under s69A of the Act). Everywhere else we'd normally compare ourselves with can either accept undertakings, or has regulation in place to prevent content lock-ups like Sky TV's portfolio of premium sports rights. Going by the questions afterwards - and my wife's similar reaction when I told her about the seminar - content lock-ups also bothered quite a few of the attendees.
And her third point was about the time it took to get to finality - "Time kills deals" - and how current processes around (for example) confidentiality and disclosure could be reviewed to get the timetable more aligned with marketplace requirements.
Sarah's presentation reminded me that there's now a fair bit of Commerce Act stuff accumulating in the new government's competition in-tray. The relevant bits of the Labour Party election manifesto proposed reviewing the Commerce Commission "to determine greatest areas of need and potential for enhancing its capabilities"; a code of conduct for the supermarkets (like what the Aussies have); reviewing s36 (abuse of market power), which again the Aussies have already dealt to; and criminalising cartels. Sarah would add revisiting s47 (the likelihood of an SLC) and s69A (behavioural undertakings). And as well as supporting s36 and cartel criminalisation I've suggested freeing up the Commission to do market studies, and removing the shipping lines' over-friendly cartel treatment. I spent a fair bit of the last government's period in office bemoaning the slow progress of reform: I hope this new one gets a faster move on.
In any event another very interesting seminar. Well done to both speakers, to the organisers - Andreas Hauser for an earlier outing over the fences in Wellington, and Richard Meade for the Auckland one - and to Russell McVeagh for hosting and sluicing. These events wouldn't happen but for generous corporate hosting.
And they wouldn't get very far without your membership subs, either. So pop along to the LEANZ membership page and hand over your $75, or $50 for students, and get set for 2018.
An anti-competitive merger should boost the share prices of the remaining rivals. If there is less competition and higher prices after the merger, the remaining rival firms in the market can follow those price rises up without fear of being undercut.
ReplyDeleteThe Sky TV merger with Vodafone announced today is an example of that. Its competition in broadband, which is Spark, experienced a small fall in its share price. Investors in that company do not anticipate higher prices in the future as a result of the merger announced today.
Hi Jim, thanks for the comment.
ReplyDeleteAt the risk of sounding like every economist ever, the answer to what happens to the share prices of remaining rivals after an anti-competitive merger is - it depends. If the Skyfone merger had gone ahead, in the Commission's view competing ISPs would have had a harder time of it in the broadband market, so their share prices should have gone down. Any anti-competitive merger that's anti-competitive because of foreclosure or margin squeezes would hit its rivals prospects, not enable them to coast on higher prices: the merged entity will be undercutting them.
But it can go the other way too in the way you describe. An anti-competitive merger that makes an already oligopolistic sector even more so could well be good for the share prices of all players. In the Z/Chevron merger for example the Commissioner who dissented from the clearance argued that the industry was already in follow-my-leader mode, and a smaller number of players would exacerbate what was already happening.
The latest Vodafone TV initiative by the way is not a merger but contractual arrangements between Sky and Vodafone. In practice though it is meant to replicate the business initiatives they had originally planned to do as a merged entity, which from memory is something they said they would do after they flagged away their legal appeal against the CC decline. In that respect it's mostly 'old news' I'd suggest, though there can still be share market reactions on the day when something actually materialises.