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Sky-Vodafone merger decision challenging - Berry

Monday 29th July 2019

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The $3.4 billion Sky-Vodafone New Zealand transaction the Commerce Commission rejected in 2017 was the most difficult of the vertical mergers former chair Mark Berry had to consider.

Vertical mergers – where a firm moves into another part of its industry supply chain – are more challenging than decisions when firms buy or merge with direct competitors, he said. The latter cases have “predictable threads of evidence” on things like how close products and services are as substitutes, the capacity of the local competitors and the level of imports.

“I found vertical mergers the most challenging of all the decisions we were faced with, particularly Sky-Vodafone,” Berry told delegates at the Competition Matters conference in Auckland on Friday.

“The particular difficulty in Sky-Vodafone is that you are speculating about the interactions of different functional levels of markets. You are a making predictions about products - when you don’t actually know what they look like yet - and you’re then having to predict how consumers are going to respond to those products.

“And that all makes for very difficult and speculative decision-making.

“We had contesting views of the applicants and the opponents, and ultimately it was up to the commission to bring forward its vision of the future.”

Berry was speaking on a panel looking at whether regulatory bodies need to be taking a tougher line with vertical mergers than in the past.

Howard Shelanski, professor of law at Washington DC’s Georgetown University, said the loss of competition in horizontal mergers meant there was a presumption of harm, greater scrutiny and a requirement for other efficiencies to warrant clearance.

Vertical mergers were considered relatively benign. Regulators had tended to assume there would be benefits for consumers from reduced margins in the supply chain and better leveraging of investment and research and development; harms were harder to see.

Shelanski said the US is seeing increasing integration in many markets, with some dominated by a handful of fully vertically integrated players instead of having multiple players at many levels.

That structure tends to raise the risk of coordinated effects and collusion that can lead prices to “float up” over time.

“Whereas with horizontal mergers there was a presumption of harm and scepticism about efficiencies, with vertical mergers there was a presumption about efficiency and scepticism of harm.

“People have started to become increasingly concerned about those presumptions in vertical mergers.”

Vodafone rival Spark New Zealand earlier this year started its own sport streaming service and outbid Sky for the rights to the Rugby World Cup in Japan. Vodafone NZ is in the process of being acquired by Infratil and Brookfield Asset Management.

When the Sky-Vodafone merger was proposed, Sky held the “Crown jewels” of live premium rugby, rugby league, cricket and netball content in “sports-mad” New Zealand, Berry noted. No-one then believed Sky’s strong sport position would change.

The broadband roll-out then underway was also an important factor as was having 5G on the horizon.

“The internal documents of the merger parties did clearly recognise this ‘once in a lifetime opportunity’,” Berry said.

The challenge for the commission, he said, was that neither it, nor the applicants knew what the new product bundles would look like, and thus how many customers might shift from other providers.

The evidence of switching from overseas markets varied widely, none of the examples had the same quality of sports content and nor did they have the unique timing issue.

But Berry said the commission knew that the firms would be able to straight away target Sky Sport users who weren’t already Vodafone mobile or broadband customers.

That was a lot of people and the commission had to assume there would be some “fairly aggressive marketing going on here, with the creation of new, very attractive bundles.”

There would clearly be short-term gains for consumers with much better bundles on offer, he said.

“Would there be short-term sacrifice of margin, for long-term gain, was the critical consideration we had to consider.”

Berry said the commission “struggled hard” using various methods to calculate the switching risks and concluded major rivals in both mobile and broadband could go into a “loss situation.” That was particularly a concern in the three-player mobile market.

“There was particularly a concern about what the future of that market would look like if we let this merger go ahead, and if that kind of effect happened – with customers being taken away from 2 Degrees such that it would no longer have the incentive or the ability to invest and compete.”

Bell Gully partner Torrin Crowther said the case showed how challenging the New Zealand regime – which requires applicants to prove there will be no harm from a merger – can be in fast-moving industries like technology.

The absence of behavioural undertakings – where applicants pledge certain actions or agree to certain prohibitions - also makes the New Zealand regime an outlier internationally, he said.

While those undertakings are only rarely accepted overseas, Crowther said they could be a useful option in this country’s regulatory “toolkit”, particularly for more challenging vertical mergers.

Berry observed that behavioural undertakings had been “on the table” in this case as Spark had indicated it would drop its opposition if undertakings on wholesale access had been available.

“That may well be a good case study to take that debate forward, as to what would that have looked like,” he said. “That would be a rich line of inquiry to inform the policy debate going forward.”

(BusinessDesk)



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