Convergence Blurs the Boundaries

18 June 2003

Olivier Fréget













Market definition is the core of any competition law analysis. Indeed, competition law is essentially articulated around two concepts — anticompetitive agreements (the agreements which restrict competition in a given market) and creation, reinforcement or abuse of a dominant position, whether by external growth (for example, mergers and acquisitions) or through specific behaviour (abuses to eliminate or weaken competitors). In both cases, the starting point of the analysis is the identification of the market in which such dominant position is held. Particularly in the case of M&As, only the concentrations that do not lead to the strengthening or creation of a dominant position may be authorised by the European Commission. Market definition thus becomes the yardstick to measure the legality of business decisions. And obviously the narrower the market, the likelier the dominant position and the imposition of undertakings in cases of concentrations.

That central place held by market definition requires not only that the criteria used for its delineation be known to companies but also that the very outcome of such analysis be foreseeable.

Such requirement becomes even more delicate when applied to the media environment. Indeed, the media is undergoing what is called in internetmedia jargon “convergence”, a phenomenon made possible by digitalisation of contents and distribution. Such convergence in technologies could be seen as blurring separations between market definitions. In the media, such evolution must further be analysed in the light of the particular nature of media services, as media also relates to the freedom of expression, and thereby to diversity and pluralism, while interfering with the cultural field.

This issue is currently taking centre stage as media undertakings in Europe enter a consolidation phase. In such a context, and notwithstanding the causes for such concentrations, which may come out of the financial difficulties arising from the price increase for access to so-called premium content such as films and sports rights, one may wonder whether the outcome of M&A operations, which took place in different member states, could be anticipated by the parties to such huge operations. The answer to that question relies ultimately in market definition, an issue examined in our recent study “Market Definition in the Media Sector - Comparative Legal Analysis”. This study is based on 300 media cases (that is, TV and broadcasting, music and radio, books and publishing and the internet) ranging from 1972 to mid-2002, and examines the overall approach to market definitions by the Commission and the National Competition Authorities.

In a nutshell, the conclusion of this study shows that market definition with respect to global or generic markets is quite similar throughout Europe. Definitions “converge”. However, that finding becomes more blurred when examining the links relating one market to another and the consequent impact of a strong market position on neighbouring (upstream, downstream or lateral) activities, particularly when dealing with new emerging and developing markets, which are the ones precisely affected by convergence.

The assessment of such markets is nevertheless key for the parties since, beyond knowing the list of markets and methodologies adopted by competition and regulatory authorities, the issue remains for them to be able to anticipate the remedies that will be imposed. When markets definitions are blurred, prospective remedies are uncertain.

Overall, national competition authorities and the European Commission do endorse comparable global positions on market definitions. For instance, in the broadcasting and TV sectors, most authorities identify, at the upstream level, an access to raw content, within which premium content or even sports events are identified as a separate market, and then make a distinction from the viewer's standpoint between pay and free TV.

On the other hand, the weight of evidence does vary from one authority to another. For instance, the Commission tends to heavily rely on the SSNIP test (Small Significant Non-transitory Increase in Price). In substance, that test aims at assessing in abstracto the reactions of consumers in the event of a price increase of a given product of 5-10 per cent over a relatively long period of time (one year or more). Products to which consumers would switch are included in the same product market, as they represent substitutes (from the consumer’s point of view) for the product that became more expensive.

Such tests are orthodox but difficult to apply, especially for delimiting markets under constant technological evolutions, while products are new or even still developing. This explains why other competition authorities such as the French Competition Council, tend to be less keen in the application of this test, this reluctance also resulting from the difficulty in obtaining precise and reliable measurements in demand variations.

Notwithstanding these differences among jurisdictions, the essential element nevertheless remains that one knows in advance the position of the authorities it is confronted with and, consequently, the types of arguments that may be put forward and accepted as evidence to support one’s point of view. The anticipation requirement is thus met.

On the other hand, such anticipation is largely undermined as far as innovative activities are concerned and also when a presence overlaps from one market to another. As far as new evolving converging services are concerned, it appears that not only are competition authorities reluctant to fix precise boundaries to such services, but also that they adopt different views on the extent to which such services compete with one another. In the broadcasting sector, that difficulty can be illustrated for instance with the views on digital TV.

At EU level, digital TV (within the pay TV market) does not amount to a relevant market that would be distinct from analogue transmission, and it does not seem that a distinction should be carried on according to the transmission path.

France tends to consider that there is a global market for digital terrestrial and for pay TV, whether by cable or satellite. On the other hand, German authorities distinguish between a market for terrestrial transmission and one for network cable transmission, relying on the fact that there is no direct contractual relationship with the consumer in terrestrial transmission. In the UK, on the contrary, the Director General of Fair Trading relied precisely on the consumers’ perspective, to determine that terrestrial TV and other forms of audio-visual entertainment were close substitutes for subscription to cable and satellite TV. In Italy, the regulation identified several market areas, including in particular the market for digital terrestrial TV programming and the market for the provision of digital terrestrial TV services.

One key to the analysis of the differences in market definitions may be found in the diversity of regulatory regimes in force in the various member states. Indeed, the media sector is subject to heavy regulation, due to the fact that it is deeply involved with other topics and is deemed to impact on fundamental liberties, cultural protection or public service, subjects which are closely monitored by member states.

Competition law analysis, which sometimes tends to be self-referencing (whether by means of precedents or by means of regulations and soft law), can thus only be understood in the media sector by reference to the obligations imposed on the actors on the market.

The differences remaining in market definition approaches, particularly at the periphery of given markets and as regards their interaction and links with other media forms, may also simply result from the fact that the authorities were not asked the same questions. The position of a given authority on a particular point often comes up only when a case is submitted to it on which a particular point arose. Should a case not arise in a given member state, then the authority does not have the opportunity (nor sometimes the jurisdiction) to give its opinion on the market definition. Furthermore, most markets are identified in a given context, that is, by comparison to another product or service. It may therefore be that in a given member state, the issue is to determine whether A and B are interchangeable, while in the neighbouring member state, the case would involve the substitutability between A and C.

In any event, such differences in approach make it particularly difficult for actors on the market to precisely identify ex ante the competitive forces with which they will be deemed to compete. Is there a competition between a digital TV broadcaster and an internet service provider (ISP), who both acquire digitalised content and who convey them through different transmission paths? Do digital interactive services, which are available on TV and on the internet, compete with one another? The answer to these questions will actually be the clue to the outcome of the appraisal of the merger, from a competition law point of view, and the basis for the imposition of any undertaking. And the difficulty of anticipation will actually be all the more prejudicial because the practical outcomes of M&As are often not so much on predetermined already known markets, but rather on the new boundaries of innovative services.

Furthermore, it seems that no competition law institution has actually, for the time being, rendered any decision that expressly and extensively apprehends the market definition issues arising from the technological evolution resulting from convergence. Decisions do mention the existence of convergence. However, they consider convergence as a somehow abstract ineluctable process, which would ultimately lead all services to be provided through the same means of communication, as it would reduce technological differences among the various forms of media.

On the other hand, convergence clearly asks the question of the intensity of links that may exist between different markets and the exact scope of the bottlenecks that may be present at various stages of the value chain. This issue is highly specific to the media environment. In no other industry, to our knowledge, is there — to such a large extent — an undertaking which would be at all stages of the production and distribution chain and be in a position at the same time to produce, sell, package and distribute content, while controlling distribution channels and having direct access to consumers and funding. In no other industry are there such important value amounts attached to immaterial goods and services, particularly when it is be borne in mind that, initially, competition law was essentially drafted to appraise market power in industrial fields of activity.

Therefore, the key to anticipating market assessment and, consequently, the type of undertakings that may be imposed upon companies, relies on knowing the boundaries of the markets on which their power will be appraised and understanding the links existing between several markets. For the time being however, the position of competition authorities facing the simultaneous presence by one media group on neighbouring interacting markets seems to end in a case-by-case analysis. Market definition thus has become the true battlefield of concentration appraisal.

In such a context, market definition could thus de facto end up being adapted on a case-by-case basis to solve the competition issues raised by a given case. Legal certainty and economic rigour require market definitions to be set independently from the case at stake, and then for competition hazards to be appraised.

In any event, it seems that the only way to address the links between media markets and the impact that convergence will have thereon, is to draft value chains, in order to precisely identify barriers to entry and bottlenecks. Even in that perspective, one may wonder whether it would not be wise for EU competition authorities to adopt an analogous methodology to the one endorsed in the telecommunications sector, where the Commission issued market guidelines, in which it mentioned a list of markets, which is not exhaustive and is subject to review and modifications and asked national competition and regulatory authorities to appraise their own national market conditions. Though not ideal, such methodology would nonetheless present the advantage of being foreseeable and capable of challenge in advance.

In such a context, an empirical economic approach would remain essential, as competition law ultimately aims at driving legal consequences from the existence of economic forces and behaviour, but conducted independently of the cases at stake. Obviously such detailed “pre-study” should be updated when an operation occurs but a common framework would have been set. On a case-by-case basis, as any legal appraisal requires the possibility of anticipation, economic factors would be further used at a later stage, that is, when appraising market power, while leaving the legal analysis of the market and of their interactions, and consequently, of the types of undertakings likely to be imposed, within foreseeable criteria.