On 3 April 2008, the German Federal Cartel Office (“FCO”) cleared the acquisition of seven subsidiaries of Orion Cable GmbH, Augsburg (“Orion”) by Kabel Deutschland GmbH, Unterföhring (“KDG”), regardless of the fact that it found the acquisition would strengthen the market dominance of KDG. The decision of the FCO is based on the so-called balancing clause, which allows the FCO to clear a planned merger despite a strengthening of a dominant market position in a case where it also has a positive effect on competition, which outweighs the negative effects.
By means of the cleared acquisition, KDG acquires selected parts of Orion’s level 4 cable network currently operated by the Orion subsidiaries Tele Columbus and Ewt. The acquired parts of the network represent the “last mile” of the broadband cable connection to approx. 1.2 million households in Hamburg, Schleswig-Holstein, Mecklenburg-West Pomerania, Lower Saxony, Bremen, Rhineland-Palatinate, the Saarland and Bavaria.
According to the FCO, the merger raises significant antitrust concerns, as KDG already holds a dominant position on the market for the feeding in of broadband content, the end-user market and the market for signal transfer. The FCO found that the dominance of KDG will be strengthened by means of the merger at least on the market for the feeding in of content and that there are strong indicators, which suggest also a strengthening of the dominance on the other markets.
However, according to the “balancing clause” in sec. 36 para. 1 of the German Act Against Restraints of Competition (“ARC”), the FCO may anyway clear the merger if it will cause improvements of the conditions of competition, which outweigh the disadvantages of the dominance.
In the case at hand, the FCO identified considerable improvements of the conditions of competition on the markets for broadband cable connections (“DSL”) and narrowband connections. Cable network operators like KDG increasingly offer internet access and telephony in addition to the common transmission of TV content via a single broadband connection (“triple play”). KDG already adapted most of its level 3 network to the requirements of triple play. By means of the merger, KDG will be in the position for the first time to provide more than 800,000 households with internet access and telephony via broadband in addition to its TV content, directly. As the DSL market and especially triple play services are still in a phase of rapid growth it is very likely that KDG will actually make use of its new position and market DSL and triple play services. In case of the prohibition of the merger, the market entrance of KDG would have been to be expected at a significantly later stage at best.
The FCO in particular hopes for an intensification of infrastructure competition on the German cable markets. Most of the German telecommunication markets are still dominated by Deutsche Telekom. With respect to the DSL and triple play market, all current competitors on these markets rely to a significant extend on the services of Deutsche Telekom, which - as a consequence - has a considerable benefit from the added value created by its competitors. KDG will represent a competitor to Deutsche Telekom, which is able to provide services largely independent from the input of the former monopolist. A market entrance of KDG might perhaps represent a first step to overcome the legacy structural deficits which are currently still inherent in German cable markets.