1. 1 A Case of Merger Remedies Sangmin Song Korea Fair Trade Commission

2. 2 Contents Introduction Background of the Industry Assessment of competitive harm Merger Remedies

3. 3 Introduction A merger case between two cable TV operators The case has involved several important issues regarding  Nexus between the nature of competitive harm and proposed remedies  Cooperation between industry-specific regulators and antitrust authorities  A choice between structural and behavioral remedies

4. 4 Background of the Industry : Multi-channel Pay TV Market ㅇ PP (Program Provider) ㅇ SO (System Operator) ㅇ RO (Retransmission Operator) ㅇ IP-TV (Internet Protocol TV) PP (Program Providers) SO (Cable TV Operators), RO, Satellite TV, IPTV Consumers

5. 5 Background of the Industry : Developments in Subscribers 80% of households subscribe to one of multi-channel pay TV services, which means 80% of households subscribe to one of multi-channel pay TV services, which means that the market is almost saturated Cable TV dominates the multi-channel pay TV market Satellite TV has failed in imposing a significant competitive constraint on Cable TV so far Classification1997199920012002200320042005 Household Total (A+B+C) Cable TV (A) Satellite TV (B) RO (C) 14,502 7,830 (54.0) 825 (5.7) - 7,005 (48.3) 15,174 7,911 (52.1) 1,398 (9.2) - 6,513 (42.9) 15,765 10,325 (65.5) 3,275 (20.8) - 7,050 (44.7) 16,080 11,737 (73.0) 6,912 (43.0) 302 (1.9) 4,523 (28.1) 16,489 12,504 (75.8) 9,402 (57.0) 779 (4.7) 2,323 (14.1) 16,988 13,319 (78.4) 10,843 (63.8) 1,297 (7.6) 1,179 (6.9) 17,858 14,200 (79.5) 11,826 (66.2) 1,855 (10.4) 519 (2.9) No. of Subscribers (Unit : 1,000 Household, %)

6. 6 Background of the Industry : Revenue by source Cable TV has experienced a significant increase in revenue since 1997  Total Revenue (Billion won) : 1,596 (’97) -> 2,360 (’99) -> 6,003 (2001) Cable TV revenue has increased partly due to the internet business and airing TV-home-shopping-service, and partly due to the growth in subscribers  In 2004, the Internet business accounted for 21.2% and fees from airing home shopping service, 16.1% of the total revenue Section Revenue Total Monthly rates Internet bus. Home shopping airing fee Ads. Other relevant Bus. ※ Installation of facility Others Total 16,029 (100.0) 8,311 (51.8) 2,851 (17.8) 2,201 (13.2) 778 (4.9) 1,024 (6.4) 506 (3.2) 358 (2.2) Cable TV 13,479 (100.0) 6,551 (48.6) 2,851 (21.2) 2,168 (16.1) 729 (5.4) 452 (3.3) 435 (3.2) 293 (2.2) Satellite TV 2,550 (100.0) 1,760 (69.0) - 33 (1.3) 49 (1.9) 572 (22.4) 71 (2.8) 65 (2.6) Revenue by source ( 2004) (Unit : Billion won, %)

7. 7 Background of the Industry: Market Concentration The Korean Broadcasting Commission’s Policy toward the cable TV industry : 1 Area 1 SO, Development of MSOs  Deepening of local monopolization in 77 broadcasting Areas  Monopolized broadcasting area: 44 areas (2004) → 57 areas (2006.3)  Acceleration of market concentration by MSOs  Out of 117 SOs, only 21 of them are independent SOs (2005)  Market share of Top 3 MSOs (subscriber basis) ： 6.8%(2004.6) → 46.7%(2005.6) Restrictions on market share for the diversification of broadcasting  Prohibition of exceeding 33% of the market (in terms of subscribers) and 1/5 of 77 broadcasting areas

8. 8 Case Study: A Merger between Two SOs HCN (Kumho Broadcast) C&T (Bukbu Broadcast) Acquired 100% of shares

9. 9 Relevant Markets and Market Shares Multi-channel pay TV market in Bukgu, Daegu A practical monopolist would appear through the merger The market share of satellite TV is far less than the national average No. of Subscribers (Market Share) TotalHCNC&TSatellite TV 2002. June 124,717 (100) 92,757 (74.4) 31,179 (25.0) 781 (0.6) 2005. June 154,365 (100) 96,185 (62.3) 52,452 (34.0) 5,728 (3.7)

10. 10 Assessment of competitive harm: Regression Analysis Monthly rate = f (a dummy for monopolist, a set of dummies for entry years, proportion of apartment/no. of household/population density in each area) Y △x△x △Y△Y a1 b1 x Regression line for monopoly Regression line for duopoly a1+ b1

11. 11 Assessment of competitive harm: errors in merging parties’ analysis Merging parties did not know the existence of quality data for monthly rates, which are published by the KBC, making a big mistake in the process of constructing monthly rates data A Huge difference in monthly rates used in the regression analysis exists between the merging parties and the KFTC  The KFTC used official figures that KBC published on monthly rates of each SO every six month Merging parties’ data Korean Broadcasting Commission’s data MonopolyCompetitionDifferenceMonopolyCompetitionDifference Monthly rate (won) 4,6333,9996346,1514,9501,201

12. 12 Assessment of competitive harm: errors in merging parties’ analysis Merging parties simply compared monthly rates without taking account of differences in the number of channels supplied  Real price can be different depending on the number of channels even if the absolute price is the same In terms of monthly rates per channel, a large price difference can occur because monthly rates and no. of channels are different between monopolistic and competitive areas Monopolistic SOCompetitive SODifference Monthly rate (won)6,1514,9501,201 (24%) No. of channel47.955.87.8 Monthly rate per channel 130.994.536.4 (38%)

13. 13 Assessment of competitive harm When carrying out the regression analysis with proper data set, monthly rates of monopolized areas are 28.1 won more expensive than those of competitive areas Based on this, assessing competitive harm yields 11.5 billion won  6-7 times higher than the one claimed by the merging parties, i.e., 1.7 billion won HCNC&TTotal Individual subscriber 4.62.87.4 Group subscriber 2.91.24.1 Total7.54.0011.5 (Unit: Billion Won)

14. 14 Remedies Allowed in the Korean Antitrust Laws □ KFTC can order the followings to address competitive concerns of a proposed merger - Prohibition of the act in question - Disposition of all or part of shares - Transfer of business - Resignation of an officer - Other corrective measures necessary to correct violation of law □ The first three measures are structural remedies, while the last two behavioral remedies

15. 15 Remedies taken in the case In this case, the possibility of price increase post merger was a main concern In this regard, the KFTC banned following actions until Dec. 31 st 2010  Act of raising monthly rates higher than inflation rate  Act of raising monthly rates indirectly through cancelling group contracts  Act of raising monthly rates by reorganizing packages or reducing no. of channels included in Packages  Act of refusing to sell a Basic Package On top of that, the KFTC Imposed on merging parties a duty to consult with the KFTC in advance when they are in a difficult condition to carry out the above corrective measures

16. 16 Why Behavioral Remedies? The KFTC took behavioral remedies rather than structural remedies, considering the following facts  This merger case was a part of the policy initiatives toward the cable TV industry pursued by the KBC  Competition in the multi-channel pay TV market would be expected to increase due to the growth of satellite TV  Even though efficiency effect was not greater than negative effect, efficiency effect would occur to some extent, including the elimination of overlapping investment in digital networks  The KBC notified the KFTC of their plans to come up with comprehensive measures in order to promote competition in the multi-channel pay TV market

17. 17 Measures by Broadcasting Authority To Promote alternative networks to cable TVs  To ease regulations on monthly rates of satellite TV  To discuss the introduction of IPTV To Review the ceiling of monthly rates for cable TV To Promote a sale of Basic package To Extend the minimum period within which cable TVs are not allowed to change package contents (6 months → 1 year) and to diversify notification methods to inform consumers of the change

18. 18 Conclusion The introduction of alternative network such as IPTV would be a fundamental solution to the problem in the cable TV market  The Analysis of competitive harm indicates that cable TV’s monthly rates will go down when there is a competition The policy direction of KBC is very important to make the market competitive, so that the close cooperation between the KBC and the KFTC is needed

19. 19 Thank you