1. Vertical Integration/Separation in Media Industry Antitrust & Regulation Issues Lecture 2 Antonio Nicita

2. Starting point: the ubiquity of vertical separation? Increasing attitude towards vertical separation in network industries as discipline device against dominant position (when essential facilities are involved) or abuse of dominant position Increasing attitude towards vertical separation in network industries as discipline device against dominant position (when essential facilities are involved) or abuse of dominant position Proprietary vs accounting separation Proprietary vs accounting separation The economic rationale is based on the idea that short run inefficiency due to increase transaction costs in monitoring and in determining internal prices among firm’s divisions could be compensated in the long run by the welfare effects induced by a more competitive environment The economic rationale is based on the idea that short run inefficiency due to increase transaction costs in monitoring and in determining internal prices among firm’s divisions could be compensated in the long run by the welfare effects induced by a more competitive environment While in the past vertical separation has mainly regarded traditional network industries (with divisibility in production and in consumption), there are now several decision which extends the criterio to media markets, and more specifically to access to valuable content. While in the past vertical separation has mainly regarded traditional network industries (with divisibility in production and in consumption), there are now several decision which extends the criterio to media markets, and more specifically to access to valuable content.

3. Aims & Summary The paper compares recent antitrust and regulatory decisions in pay-tv markets in UK, Australia and Italy. The paper compares recent antitrust and regulatory decisions in pay-tv markets in UK, Australia and Italy. 1. (OFT vs BskyB) Abuse of dominant position 2. (ACCC vs Foxtel+Telstra+Optus+Austar) Anticompetitive agreements among competitors 3. (EU Commission vs NewsCorp/Telepiu’) Horizontal merger Different market structures, different cases, different authorities but common trend in remedies and policies Different market structures, different cases, different authorities but common trend in remedies and policies Competition Issues raised a) Access to content and facility-based competition: change in the economic attitude towards premium content exclusivity on the pay TV markets b) Creation of a wholesale market for contents and channels c) Mandatory unbundling at the wholesale level d) Retail bundling vs. Wholesale unbundling e) Pricing (retail minus), pure bundling, asymmetric mixed bundling, full mixed bundling

4. The puzzle of Pay tv Content is the king. But also platforms. Content is the king. But also platforms. Chicken egg dilemma: content access vs platform building Chicken egg dilemma: content access vs platform building European pay-tv markets are characterised by a very oligopolistic structure from the supply side of the market, dominated by two holding groups (Vivendi and Murdoch) European pay-tv markets are characterised by a very oligopolistic structure from the supply side of the market, dominated by two holding groups (Vivendi and Murdoch) In recent years there has been (a) a positive growth rate in terms of subscribers but (b) huge losses in recent years due to the extraordinary growth of the so-called ‘programming costs’, i.e. the costs of acquiring exclusive premium content rights (such as movies and sport events), which cover about the 70-80% of the total costs. In recent years there has been (a) a positive growth rate in terms of subscribers but (b) huge losses in recent years due to the extraordinary growth of the so-called ‘programming costs’, i.e. the costs of acquiring exclusive premium content rights (such as movies and sport events), which cover about the 70-80% of the total costs. More than a natural monopoly: a supernatural monopoly More than a natural monopoly: a supernatural monopoly Wave of vertical and horizontal mergers in Europe Wave of vertical and horizontal mergers in Europe

5. The rise and the fall of regulatory interventions in the UK pay-tv market The rise and the fall of regulatory interventions in the UK pay-tv market OFT in 1994 started formal investigation on BskyB subsequently reviewed in 1996 OFT in 1994 started formal investigation on BskyB subsequently reviewed in 1996 In 1996 BskyB has officially undertaken a number of commitments regarding: In 1996 BskyB has officially undertaken a number of commitments regarding: (a) the obligation to make a non-discriminatory wholesale offer to downstream competitors; (a) the commitment to avoid any discount either pricing mechanism aimed at decreasing the profitability of downstream competitors

6. Vertical structure in UK Market Satellite covers still today about 60% of the market, while cable covers about 30% of the market. The remaining part is actually occupied by DTT, while only 0.1% is actually covered by ADSL. In the retail-distribution market BskyB has around 66% of pay-TV subscribers in the UK BskyB is the only supplier of premium sports and movies channelsat teh wholesale level

7. UK:OFT 2002 Investigation OFT investigation’s main purpose was thus to respond to competitors complains such as: OFT investigation’s main purpose was thus to respond to competitors complains such as: A. the allegation that BSkyB was abusing a dominant position by exercising a margin squeeze in relation to its premium channels, Sky Sports 1, Sky MovieMax and Sky Premier against rival distributors of pay TV; B. the allegation that BSkyB was abusing a dominant position by pricing its channels in the form of anti-competitive ‘mixed bundling’; C. the allegation that BSkyB was abusing a dominant position by giving anti-competitive discounts to distributors. CONCLUSION: insufficient evidence! CONCLUSION: insufficient evidence! Questions Questions

8. The evolution of Australian Pay TV Market 3 major operators: Foxtel (>50%), Austar (25%), Optus (17%) 3 major operators: Foxtel (>50%), Austar (25%), Optus (17%) Foxtel is the most successful operator, with 800,000 households receiving its service as at June 2003. In March 1999 it launched services via satellite and satellite customers now account for more than 35 per cent of its subscriber base. Foxtel is the most successful operator, with 800,000 households receiving its service as at June 2003. In March 1999 it launched services via satellite and satellite customers now account for more than 35 per cent of its subscriber base. Austar is the second supplier of retail pay-tv services and reached 406,000 subscribers. It has virtual monopoly in regional and rural Australia. Indeed Austar generally competes in a different geographical area to Foxtel and Optus. Austar is the second supplier of retail pay-tv services and reached 406,000 subscribers. It has virtual monopoly in regional and rural Australia. Indeed Austar generally competes in a different geographical area to Foxtel and Optus. Optus has 270,000 subscribers. Optus is not a pure pay-tv services supplier indeed it does not sell pay-TV as a standalone product but bundles it with high-speed Internet and local telephone services. Optus has 270,000 subscribers. Optus is not a pure pay-tv services supplier indeed it does not sell pay-TV as a standalone product but bundles it with high-speed Internet and local telephone services. 3 arrangements: Foxtel/Optus; Foxtel/Austar 3 arrangements: Foxtel/Optus; Foxtel/Austar

9. Vertical relations in pay-tv in Australia Vertical relations in pay-tv in Australia

10. Accc Decision and new debate On November 2002 the ACCC announced that it believed the undertakings finally offered addressed the competition concerns that it had identified On November 2002 the ACCC announced that it believed the undertakings finally offered addressed the competition concerns that it had identified Undertakings: Undertakings: 1. Wholesale offer based on retail minus principle to small operators 2. Removal of clauses inducing lower competition at the acquiring levels 3. Limits on Telstra discount percentage in bundling DEBATE: ACCC further remarked the risk of a Foxtel monopoly in wholesale market and suggested new regulatory approach aimed at imposing mandatory unbundled wholesale offer and the removal of exclusivity ACCC further remarked the risk of a Foxtel monopoly in wholesale market and suggested new regulatory approach aimed at imposing mandatory unbundled wholesale offer and the removal of exclusivity

11. The NewsCorp/Telepiu’ merger on the Italian market for pay tv In 2003 the European Competition Commission has authorized the merger between the two satellite pay tv operators in Italy Stream (NewsCorp) and Telepiu’ (CanalPlus). In 2003 the European Competition Commission has authorized the merger between the two satellite pay tv operators in Italy Stream (NewsCorp) and Telepiu’ (CanalPlus). The Commission has finally authorized the merger under several conditions concerning, among the others: The Commission has finally authorized the merger under several conditions concerning, among the others: a. the removal of holdback exclusivity clauses; b. a mandatory wholesale on unbundled basis and following the retail minus principle c. Access to satellite platform for DTH competitors.

12. Post-merger scenario in Italy Sky broadco Sky techco Rights contents holders Sports, movie Independent channels Sky Disco Competitors in platform eBiscom, telecom italia* Satellite Competitors in contents Gioco calcio subscribers

13. Main lessons Common trend: creation of a wholesale market and mandatory wholesale Common trend: creation of a wholesale market and mandatory wholesale Paradox: what is the role of exclusivity? Paradox: what is the role of exclusivity? The Copernican revolution in EU Commission’s appraisal of exclusivity (content is the king but the king has to be shared! it is the exclusivity strategic request which increases the cost of acquisition, and not vice-versa!) The Copernican revolution in EU Commission’s appraisal of exclusivity (content is the king but the king has to be shared! it is the exclusivity strategic request which increases the cost of acquisition, and not vice-versa!) Confusion: content-based vs facility-based competition? Confusion: content-based vs facility-based competition? Most Coherent Approach: Merger Decisions as possible regulatory model Most Coherent Approach: Merger Decisions as possible regulatory model A new issue with could be pointed out: unbundled wholesale constrains incumbent retail bundling. What are the effects? Who should be favored? A new issue with could be pointed out: unbundled wholesale constrains incumbent retail bundling. What are the effects? Who should be favored?

14. Bundling vs wholesale PRICE OF THE BUNDLE PRICE OF THE BASIC MINIMUM PRICE FOR WHICH BUNDLE IS PROFITABLE AT GIVEN CONDITIONS

15. Main open issues This new approach however could be undermined by a series of regulatory problems such as: This new approach however could be undermined by a series of regulatory problems such as: 1. the economic criterion to be applied to determine an wholesale price; 2. the pricing mechanism to be identified in order to provide a non-distorted unbundled wholesale offer when the retail price is referred to a bundle; 3. the accounting separation to be implemented to verify any ex-post price squeeze by the incumbent vertically integrated operator; 4. the design of asymmetric regulatory measures to favour new entrants investments in new technology.